The UK’s reputation as a dividend safe-haven took a knock in 2020 as companies were forced to cut and suspend dividends in the wake of the Covid-19 pandemic.
Indeed, considering that UK companies are now paying out just half the dividends they were in 2019, UK income investors have started to look abroad for attractive yields in different markets.
One area with attractive yields is Canada.
According to the Janus Henderson Global Dividend index, Canada recorded its 15th consecutive quarter of dividend increases in Q3 2020.
Providing a window on the US economy and its emphasis on renewable technology, the market could help UK income investors diversify and give them a healthy yield to boot.
Part of the reason that the Canadian market was able to increase payouts through Q3 was the way in which it has navigated the pandemic.
“We came into 2021 expecting a few things,” said Dean Orrico, president and chief investment officer of Middlefield Group, which oversees the £98m Middlefield Canadian Income Trust.
“Firstly, the healthcare crisis to gradually abate and we remain optimistic about that.
“This combined with supportive monetary stimulus which will likely stay like for the next two-to-three years and large-scale fiscal stimulus in the US.”
After the results of the Georgia run-off were announced on 6 January, Republicans lost both seats in the Senate allowing for a Democratic clean sweep across the board.
And while there is only a small majority, a Democrat-controlled Senate could mean president-elect Joe Biden’s bigger stimulus plans stand a greater chance of getting through.
Although it could also pose a greater risk of tighter regulation and higher taxes.
“It won’t create any earth-shattering policy changes because it is the slimmest of leads,” said Orrico. “Plus, the presence of a number of independently minded senators on both sides of the aisle will serve to reduce the risk of sweeping policy and regulatory changes.
“Furthermore, the Democrat focus on enhanced fiscal stimulus and incentivising investment in sectors such as clean and renewable energy should improve sentiment in these areas.”
Orrico explained that the ability for renewables – a key area for the Canadian market – to capture market share in such circumstances could be profitable.
“You don’t need government subsidies anymore to make renewables economic,” he added.
In Canada, non-hydroelectric renewables grew from 1.5 per cent of total electricity generation to 7.2 per cent between 2005 and 2016. Now only around 20 per cent of Canada’s electricity comes from fossil fuels.
“This is a sector we thought would succeed regardless,” said Orrico. “But, by virtue of what happened in the Georgia runoff, it’s now been given a boost in the arm.
“Renewables now provide the cheapest sources of electricity across most of the world and the economic advantages of developing clean infrastructure projects are apparent.”
“The political, societal and corporate support for a green energy revolution is in place, which should drive massive amounts of investment into sustainable infrastructure for decades to come.”
On top of that, Goldman Sachs projects that spending on renewable power will overtake that of oil & gas drilling for the first time this year.
Middlefield’s stance on renewables is reflected in its large positions in Brookfield Renewable Partners and Northland Power, which account for nearly 10 per cent of Middlefield Canadian Income Trust’s net asset value (NAV).
Its other positions changed in Q4 to reflect its changing outlook for healthcare and for the fiscal and monetary environment.
As such, financials now represent 30 per cent of the trust’s NAV.
Considering that banks and life insurance companies offer attractive dividends, greater exposure to these businesses help to guarantee a healthy income for investors, the fund manager noted.
The trust’s portfolio also includes several US banks – such as JP Morgan Chase, Bank of America and Citigroup – to complement its Canadian financial holdings, giving it greater exposure to the world’s largest economy on its doorstep.
“The financials are definitely the bucket that will move the needle,” said Anthony Tavella, executive director at Middlefield International. “They are more diversified businesses in Canada, blossoming wealth management franchises which are not all rate dependent.”
With a yield of 5.4 per cent, the trust represents an attractive choice for UK income investors who have seen sustained cuts in 2020.
“We don’t anticipate any cuts to our dividends,” said Orrico. “We only had two companies cut dividends in our whole portfolio in 2020 which shows the stability of the underlying dividends coming in which we’re flowing through to investors.
“From a diversification perspective, it gives unique exposure to the Canadian market and US exposure in areas that we find are under-represented in Canada,” he said.
Orrico said that as Canada is the largest trading partner with the US, it is a ‘window’ on the US economy. Its relative stability too makes it, arguably, a safer place to invest than its southern neighbours.
“To be able to get this type of exposure to a stable dividend at a 10-12 per cent discount to NAV is extremely attractive in this kind of environment,” said Orrico.
Performance of trust vs sector over 5yrs
Source: FE Analytics
The Middlefield Canadian Income Trust has returned 67.50 per cent over five years, compared with 129.33 per cent for the IT North America sector average. It has ongoing charges of 1.32 per cent, is 15.3 per cent geared, and is trading at a 13.9 per cent discount to NAV, according to the Association of Investment Companies (AIC).