• Skip to main content

MOOSE MARKETS

INVESTING THE CANADIAN WAY

  • Dividend Investing
    • Canadian Dividend Aristocrats
    • USD Dividend Canadian Stocks
    • Beat The TSX!
    • CANOE INCOME FUND (EIT.UN.TO)
  • Best Canadian Stocks
    • Best Canadian Stocks 2022
    • Dividend Rockstars
    • Canadian Banks
    • Cdn Depositary Receipts (CDRs)
    • Best Canadian Tech Stocks in 2022
    • Best Energy Stocks to Buy in 2022
  • How To
    • Norbert’s Gambit
    • Smith Manoeuvre
    • Buy Canadian Stocks
  • REITs
    • Best Canadian REITs
    • Monthly REITs
    • REITs Beginner’s Guide
    • High Yield Canadian REITs
  • ETFs
    • Best Canadian Dividend ETFs
    • How to Analyze ETFs
    • Covered Call ETFs
  • PODCAST
  • GRAB YOUR BOOK

Mike

Canadian REITs Beginner’s Guide

Since REITs are a different type of corporate structure, they deserve to be addressed separately.  REITs are tax-advantaged investments. They pay no corporate tax, but in return, they must meet certain guidelines. They must invest primarily in real estate and must pay out most of their net income as dividends.

Canadian REITs can be good investments because they typically offer above-average dividend yields and can give an investor exposure to real estate without the typical difficulties of owning real estate directly (low liquidity, responsibility for maintenance, etc.).

Real Estate Income Trust Basics (REITS)

REITs are not only popular because they distribute generous dividends, but also because they are easy to understand. Investors can picture an apartment building or an office tower and see how tenants pay their rent monthly. They are willing to purchase units of those businesses in exchange for the income and peace of mind.

The concept of being a landlord and having tenants is comparatively simple to understand. The company owns and manages Real Estate in exchange for receiving rental income from properties such as apartment complexes, hospitals, office buildings, timber land, warehouses, hotels, and shopping malls.

Most REITs are equity REITs. They must invest most of their assets (75%) into real estate or cash equivalents. In other words, they cannot produce goods or provide services with their assets. This is how REITs must also receive 75% of their income from those real estate assets in the form of rent, interest on mortgages or sales of properties. REITs must also pay a minimum of 90% percent of its taxable income in the form of shareholder dividends each year. Therefore, the classic earnings per share and dividend payout ratios cannot be considered the sole gage of the health of an REIT.

There are several types of REITs:

Equity REITs

Equity REITs own and invest in property. They may own a diversified set of properties, and they generate income primarily in rent payments from leasing their properties.

Mortgage REITs

Mortgage REITs finance property. They generate income from interest on loans they make to finance property.

Hybrid REITs

Hybrid REITs do a bit of both, as they own property and finance property.

In general, REITs offer great investment opportunities by their nature. A growing economy leads to growing needs for properties. REITs can grow organically as the population requires more industrial facilities, healthcare centers, offices, and apartments.

Sub-Sector (Industry)

REIT – Diversified REIT – Mortgage REIT – Specialty
REIT – Healthcare Facilities REIT – Office Real Estate – Development
REIT – Hotel & Motel REIT – Residential Real Estate – Diversified
REIT – Industrial REIT – Retail Real Estate Services

REITs Greatest strengths

REITs are unique as they distribute most of their income. In fact, they exist to pay generous distributions. This makes them one of the retirees’ favorite sectors! Since these businesses must give most of their profits to shareholders, it is easy to understand how most of them offer a relatively high dividend income. This is one of the rare sectors where you can find “relatively safe” stocks paying 5%, 6% even 7%+. Investors must be careful not to get too greedy, though. We have seen several REITs cutting their dividends due to poor management or economic downturns.

REITs are not only popular because they distribute generous dividends, but also because they are easy to understand. Investors can picture an apartment building or an office tower and see how tenants pay their rent monthly. They are willing to purchase units of those businesses in exchange for income and peace of mind.

REITs usually bring stability in a portfolio along with higher yield. This is a great sector to start with when you are looking for additional income. Real Estate brings great diversification to your portfolio. Research has proved that REITs are not directly correlated to stock market movements over the longer term.

Finally, since most of them operate with escalator contracts, they offer great protection against inflation. Many Income trusts will include yearly rent increase in their rent to insure rental income matches inflation. Some REITs also operate under a Triple-Net business model. In this case, tenants take care of insurance, taxes, and maintenance costs, reducing the REITs expenses (and risk of unexpected charges!).

REITs Greatest weaknesses

One of the REIT sectors’ favorite ways to finance their new projects is to issue more units. Therefore, if a company purchases a property generating $20M per year but needs to issue more units to finance the purchase, you must look at the net outcome for unitholders. If the FFO per share drops, this is not necessarily good for you as it will affect the REIT’s ability to increase its dividend in the future.

Another downside related to their business model is their lack of flexibility. We have seen many times where REITs try to shift their focus from one industry to another. In most cases (H&R, RioCan, Boardwalk and Cominar to name a few), the change of trajectory comes with a dividend cut and a loss in value for unit holders. A REIT wishing to get rid of their shopping malls to buy more industrial properties will likely have to sell properties at a lower price and pay a hefty one to buy more appealing assets.

Finally, do not make the mistake of thinking REITs are safer than other sectors. Those are companies facing challenges while benefitting from tailwinds. While you may argue that an apartment building can’t go anywhere, I would answer back that if you have one hundred empty apartments due to an oversupply in a neighborhood, your money will also go nowhere.

How to get the best of REITs

While REITs are part of a short list of sectors that are perfect for retirees or other income seeking investors, it is important to understand that they cannot be analyzed using the same metrics as other sectors.

The Funds from Operations (FFO) and Adjusted Funds from Operations (AFFO) are probably the most useful tools to analyze a REIT’s financial performance. Those two metrics replace the earnings and adjusted earnings for a regular stock. While those are different metrics, it’s all about cash flow and the REITs ability to sustain their dividend payments. Fortunately for us, we can find those metrics inside each REIT’s quarterly report and subsequent press release. It is important to not only follow the FFO/AFFO in total but also to follow the FFO/AFFO per unit of ownership.

FFO = Earnings + Depreciation (Amortization) – Proceeds from Property Sales

AFFO = Earnings + Depreciation (Amortization) – Proceeds from Property Sales – Capital Expenditures

The use of the loan to value ratio (LTV) is a great tool to analyze the REIT’s future ability to raise low-cost capital. The LTV is easy to calculate from the financial statement, as you only need 2 measures of data:

LTV = Mortgage Amount / FMV of properties

You certainly don’t want to invest in a REIT showing a high LTV. This means that their credit rating may be at risk and the price for future debt will be higher. In other words, it could mean less money for future dividends.

The last metric you must follow that is specific for REITs is the Net Asset Value (NAV). The NAV (usually shown by units) can be translated to the equivalent of a Price to Book ratio.

NAV = Total Property Fair Market Value – Liabilities

The idea is to compare a few REITs from your list against one another. This is how you should be able to find the ones with the best metrics. A lower than industry NAV is either a riskier play or a value play. The AFFO and LTV will tell you which one it is.

The REIT sector is best for income investors.

Target sector weight: For income-seeking investors, you can aim at 15% to 30% (if you invest in various industries). For growth investors, REITs could represent a 5%-15% portion of your portfolio.

Do not use the payout ratio to determine the REIT’s dividend safety

Trusts have a special tax structure and they are required to distribute 90% of their taxable income. Therefore, using the payout ratio (which is based on earnings) will not be of help. The metric you are looking for is the Funds From Operations (FFO) and the Adjusted Funds From Operations (AFFO) payout ratios.

Funds from Operations Payout Ratio

Formula: DIVIDEND PER SHARE (DPS) / (ADJUSTED) FUNDS FROM OPERATIONS (FFO) PER SHARE

Utilization: Real Estate Income Trusts (REITs).

Since REITs are required to distribute at least 90% of their net earnings, the utilization of the adjusted funds from operations (AFFO or FFO) is a more precise metric. Like the payout and cash payout ratio, it’s preferable to look at a long-term trend.

Pros: Similar to the cash payout ratio, you get a clear picture of how much cash the company has to pay dividends.

Cons: In most cases, you can’t calculate the FFO payout ratio yourself or find it in general finance websites (therefore we try to mention it in our DSR Stock cards). You must rely on the company’s information found in their quarterly earnings reports. It requires additional time to establish a trend over several years.

REITs valuation

Valuing a REIT is like valuing any stock. Much like with MLPs, I generally utilize the Dividend Discount Model to value them, since most of their profits are paid as dividends.

There are, however, a few key metrics to know.

Net Asset Value is another estimate of intrinsic value. It is the estimated market value of the portfolio of properties, and it can be determined by using a capitalization rate on the current income that is fair for those types of properties. This can potentially understate the value of the properties because properties may appreciate rather than depreciate over time.  Compare the NAV to the price of the REIT.

The Funds from Operations (FFO) are far more important than net income for a REIT. Due to their tax structure, earnings mean almost nothing, and instead, it is all about the cash flow. To determine net income, depreciation is subtracted from revenues, but depreciation is a non-cash item and may not represent a true change in the value of the company’s assets.

So FFO adds back depreciation to net income to provide a better idea of what the cash income is for a REIT.

Adjusted Funds from Operation (AFFO) is arguably the most accurate form of income measurement of all regarding REITs since it takes FFO but then subtracts recurring capital expenditures on maintenance and improvements. It is a non-GAAP measure, but a very good measure for the actual profitability and the actual amount of cash flow that is available to pay out in dividends.

Overall, it is good to look for REITs that have diversified properties, strong FFO and AFFO, and a good history of consistent dividend growth.

REIT Advantages and Disadvantages

The advantages and disadvantages of REITs are like that of MLPs. They typically have high dividend yields, but their dividend growth rates are generally on the lower side.  They rely less on issuing new shares.

Advantages:

-REITs typically have above-average dividend yields.

-REITs serve as good protectors from inflation. If inflation occurs, property values and rents should increase over time, but fixed-interest debt that is used to finance the properties will not.

-Real Estate, if managed conservatively, can be a very reliable investment in terms of cash flow and in terms of dealing with recessions assuming rents are paid by the REIT’s tenants.

Disadvantages:

-REITs often have low dividend growth.

-REITs generally utilize debt to add to their property portfolio, but they typically make up for larger debt loads by using that debt for conservative, appreciating assets.

-Since REITs must pay out most of their income as dividends, they have little downside protection from recessions.  They may have to trim the dividend if their cash flow dips below their distribution levels. There are, however, some REITs that have developed good track records of consistent dividend growth.

Favorite Picks

Based on a mix of diversification, growth perspective, and dividend growth, we have identified three Canadian REITs that we like:

Granite (GRT.UN.TO)

Granite REIT Dividend Triangle

GRT used to be an extension of Magna International (MG.TO). In 2011, Magna represented about 98% of its revenues. It is now down to 28% as at August 2022 (with Amazon as its second-largest tenant with 5% of revenue). Management has transformed this industrial REIT into a well-diversified business without adversely affecting shareholders. GRT now manages 127 properties across 7 countries. Each time we review this stock card, the number of properties increases while the exposure to Magna Intl reduces. The REIT also boasts an investment grade rating of BBB/BAA2 stable. With a low FFO payout ratio (around 77%), shareholders can enjoy a 3%+ yield that should grow and match or beat the inflation rate. This is among the rare REITs exhibiting AFFO per unit growth while issuing more units to finance growth. Granite is also part of the best monthly dividend REITs.

CT REIT (CRT.UN.TO)

CT REIT Dividend Triangle

An investment in CT REIT is primarily an investment in Canadian Tire’s real estate business. If you think this Canadian retail giant will do well in the future, but you are more interested in dividends than pure growth, CT REIT could be a good fit for you. Canadian Tire has exciting growth plans that will eventually lead to more triple-net leases for CT REIT. The fact that CRT pays a monthly dividend with a yield of approximately 5% is highly attractive to income-seeking investors. On top of that, CT REIT exhibits a decent dividend growth rate policy matching and beating inflation. This makes it a perfect candidate for an income-focused portfolio. Canadian Tire has done well during the pandemic thus far and has proven the resilience of its business model. It’s a sleep well at night REIT that should please all income-seeking investors.

InterRent (IIP.UN.TO)

Interent REIT Dividend Triangle

IIP is what we describe as an “active REIT” where the company actively buys, improves, and recycles properties. This was a lucrative business model to manage in two growing provinces (Ontario and Quebec) over the past few years. InterRent seeks to acquire properties that have suffered from the absence of professional management. This is how they can buy at a lower value and relatively easily profit from their investment. Although IIP seems to exhibit a solid business model, we should keep in mind that things weren’t so successful over the 2008 financial crisis. The REIT has continued to demonstrate the resilience of its portfolio throughout the pandemic. With an occupancy rate hovering around 95% and the ability to increase rents by 5-6% per year on average, IIP is well-positioned to fight inflation in your portfolio. It hasn’t slowed down its appetite for growth and the REIT has managed to keep its dividend increase streak alive.

Those REITs are great, but there is more!

We are now in market correction territory, and the fear of losing more money is growing. What will happen if we keep up with continuous high inflation?

If you look at past performances, Real Estate Income Trust is one of the best performing classes during high inflation periods since the 70s. Unfortunately, not all REITs are created equal and you must do adequate research to make sure you buy the right ones.

In this webinar, I will answer questions like:

  • How about REITs paying a 10% yield
  • How to make sure the REIT’s distribution is safe
  • Which metrics to consider during my analysis?
  • Should I consider mortgage REITs?
Watch the free Webinar replay here

 

Best Monthly REITs

 

Are you about to retire? You are probably looking to generate monthly revenue to support your retirement. In general, dividend-paying stocks will pay a quarterly dividend. However, some Canadian companies are paying monthly distributions. Since most of them are Real Estate Income Trusts (REITs), we created this list of all monthly distribution REITs.

What Makes REITs great monthly payers?

As most companies prefer to keep cash in their account and wait to pay shareholders at the end of the quarter, many Canadian REITs have opted for a monthly distribution structure.

Imagine that you purchase a rental property. Every month, you would receive payments from tenants, making up a perfect monthly revenue source, right? Well, REITs are structured the same way, except they own several properties with several tenants. Since they receive a monthly cash flow stream, they share the wealth and pass the money along to unitholders.

Monthly Distribution REITs List

Monthly distribution REITs

At DividendStocksRock, we track over 1,000 dividend-paying stocks. Only 79 Canadian companies pay a monthly dividend from this list, and half of them (40) are REITs. Here is the complete list of all monthly distribution REITs.

Our Top 3 Monthly REITs

Some of the best Canadian REITs are paying a monthly distribution. Here are some of our favorites:

Granite REIT (GRT.UN.TO)

Market Cap: $4.4B

Dividend Yield: 4.50%

Sub-Sector: Industrial

GRT used to be an extension of Magna International (MG.TO). In 2011, Magna represented about 98% of its revenues. It is now down to 28% as at August 2022 (with Amazon as its second-largest tenant with 5% of revenue). Management has transformed this industrial REIT into a well-diversified business without adversely affecting shareholders. GRT now manages 127 properties across 7 countries. Each time we review this stock card, the number of properties increases while the exposure to Magna Intl reduces. The REIT also boasts an investment grade rating of BBB/BAA2 stable. With a low FFO payout ratio (around 77%), shareholders can enjoy a 3%+ yield that should grow and match or beat the inflation rate. This is among the rare REITs exhibiting AFFO per unit growth while issuing more units to finance growth.

Dividend Growth Perspective

GRT has maintained a solid dividend growth policy over the past 5 years (4%+ CAGR). With its FFO payout ratio well under control shareholders should expect a mid single-digit dividend growth rate going forward. The company even paid a special dividend in 2019. In fact, if the Magna International business is doing well, GRT will perform and keep increasing its dividend. We issued a buy rating on Granite a while ago. It’s still a buy, especially considering the latest price drop!

Killam Apartment REIT (KMP.UN.TO)

Market Cap: $1.75B

Dividend Yield: 4.50%

Sub-Sector: Residential

KMP’s current business model ensures a modest but steady cash flow trend, as rent increases by 1.8% per year, on average. We like the monthly distribution that follows inflation and protects income-seeking investors’ buying power. With many new projects in Ontario and Nova Scotia, KMP plans on providing shareholders with additional growth in the next few years. The apartment suites were mostly located in Nova Scotia (34%), Ontario (23%), New Brunswick (20%), and Alberta (8%). Geographic diversification aids KMP in achieving stable and reliable results quarter after quarter. KMP is the perfect example of a “boring is good” business.

Dividend Growth Perspective

Management is increasing its monthly distribution carefully and managed to bring its AFFO payout ratio back from 123% in 2013, to an acceptable level of 76% for the full year of 2021. The REIT has been able to improve its payouts due to strong same-property performance and continuous acquisitions. In the meantime, the distribution is tracking inflation with a roughly 2% growth rate over the past 5 years. The latest increase in 2021 was of 3%. Shareholders can expect to match inflation going forward as the REIT payout ratios are under control.

Canadian Net REIT (NET.UN.V)

Market Cap: $137M

Dividend Yield: 5.10%

Sub-Sector: Diversified

This is an interesting small REIT that has flown under the radar. Canadian Net REIT enjoys stable cash flows from its properties under the triple net lease formula (tenants handle insurance, taxes, and maintenance costs). Triple net lease REITs let tenants manage more risk as they handle all expenses involving the property. The REIT has high-quality tenants such as Loblaws (25% of NOI), Walmart (11%), Sobeys (10%), Suncor (7%) and Tim Hortons (6%). The REIT’s portfolio makes this company quite resilient to any kind of recession. We got a good idea of how NET fared during the 2020 lockdowns as its revenue continued to increase. The bulk of its properties are situated in the province of Quebec, with a small number in Ontario and the Maritimes.

We should keep in mind that the company trades on the TSX Venture. This small-cap (under $150M of market capitalization) is subject to low trading volume and strong price fluctuations. Follow this one quarterly to make sure the situation remains stable.

Dividend Growth Perspective

Don’t be alarmed by the dividend drop in 2018, as the REIT simply changed its payment schedule. In fact, this small-cap has been continually increasing its dividend since its IPO in 2011. Their FFO payout ratio is maintained between 55% and 65% as their FFO per unit grew just as quickly as its dividend in the past decade (in fact, it grew even faster). In other words, the dividend is safe and will continue to increase. NET increased its dividend by 12% in 2021, giving investors a glimpse of what to expect. Bear in mind that the distribution is a mix of dividend and return of capital, depending on the year. An investor should make sure to visit their investors’ websites before investing. This remains a small-cap stock subject to high fluctuations in price per share.

Those REITs are great, but there is more!

We are now in market correction territory, and the fear of losing more money is growing. What will happen if we keep up with continuous high inflation?

If you look at past performances, Real Estate Income Trust is one of the best performing classes during high inflation periods since the 70s. Unfortunately, not all REITs are created equal and you must do adequate research to make sure you buy the right ones.

In this webinar, I will answer questions like:

  • How about REITs paying a 10% yield
  • How to make sure the REIT’s distribution is safe
  • Which metrics to consider during my analysis?
  • Should I consider mortgage REITs?
Watch the free Webinar replay here

 

Canadian Banks Ranking

Canadian banks are amazing; they have outperformed the Canadian stock market for the past 5, 10, 15, probably 25 years. Unfortunately, they were not created equal. That’s a myth. Then, which Canadian Bank is the best?

Canadian banks total return

Since the 2008 financial crisis, each member of the big six (Royal Bank, TD Bank, ScotiaBank, Bank of Montreal, Canadian Imperial Bank of Commerce and National Bank), took a different direction.

They all benefitted from the oligopoly environment in Canada to fund new growth vectors. 14 years later, if you pick the wrong bank, you will be leaving a lot of money on the table.

Let’s take a look at our Canadian Bank Ranking from position 6 to 1.

But first, let’s review their latest quarterly earnings:

#6 ScotiaBank (BNS.TO)

BNS is the most international bank in the Canadian banking industry. It has significantly expanded its business outside of Canada with 40% of its assets outside the Canadian border. This hasn’t always been an advantage as BNS ran into its share of problems with South American economic struggles. The bank reduced its international footprint and has limited it to 30 countries currently, from 54 in 2013. Expected GDP growth for these countries is quite attractive (higher than Canada and the U.S.), but this comes with much uncertainty and volatility. BNS is now a dominant player in Chile with its most recent acquisition of BBVA Chile in 2018. The bank has a strong track record of acquiring and integrating businesses. The most recent quarterly results show an economic recovery across the Pacific Alliance, a lower provision for credit losses, growth in wealth management, but lower income in capital markets.

Pros:BNS.TO DIVIDEND TRIANGLE

  • Best diversified, most international: For over a decade, BNS focused on growing outside Canada (especially in Central America and in South America). Obviously, their Gross domestic product (GDP) growth rate is better than US and Canada. Their perspective moving forward is also better (they should grow at a 3%-4% rate while it will be hard to reach over 1%-2% in Canada and the US).

Cons:

  • International exposure brings uncertainties: Before the pandemic, BNS had a great story, but they never capitalized on it, and they never outperformed other banks. Why? It’s complicated to do business in Central America! It took several years and several missed attempts for Canadian banks to enter the US. They made bad acquisitions and failed several times. Look at South America and Central America, you realize it’s a lot more complicated than making loans in the US. It’s even worse with the pandemic as countries with lower resources and weaker healthcare systems will face more problems than in North America.
  • Worst performing stock from the top 6 over the past 10 years. With all the difficulties I just mentionned, I’m not expecting them to reverse that trend in the upcoming months and the upcoming years.

#5 Canadian Imperial Bank – CIBC (CM.TO)

While CIBC lags behind the other banks on the stock market (along with ScotiaBank), it gives investors the opportunity to pick up a generous yield without significant risk. We like that they want to grow their wealth management division, but the integration of Private Bank will represent a crucial step. If an investor is looking for additional income, CM is probably one of the best picks on the Canadian stock market; it just can’t be expected to outperform the banking industry over the long run. CIBC is trading at a low PE ratio versus its peers since it has lower growth expectations. On the bright side, the dividend is not at risk, and an investor will enjoy consistent increases. CIBC will likely be a good fit for a retirement portfolio since it offers the stability of a top 5 Canadian bank with a decent yield and the security of future dividend growth. We must add that the bank has done very well in 2021 and its recent results pushed CM’s price to its highest price level in history. Let’s put it this way: it’s hard to perform poorly when you invest in a Canadian bank!

CM.TO DIVIDEND TRIANGLE

Pros:

  • High yield with a relatively low payout ratio: When you do the math, a low stock price brings a higher yield. A low PE ratio also brings a high yield and so the stock price is low…
  • Mortgage loans: The mortgage side is doing well as housing market in Canada is doing well. But when your biggest growth vector is mortgages right now, I don’t think it will result in outperforming the other banks.
  • Private banking and wealth management: Smart move, but a little late. CIBC is a small player in this ground compared to the others.

Cons:

  • Lack of growth vectors: With interest rates super low, interest margin will be squeezed. CIBC’s only way out is to do more loans. That could be a very difficult path in the next years considering the consequences of the pandemic on the economy.

#4 Bank of Montreal – BMO (BMO.TO)

BMO decided to take the stock market path to ensure its growth. It was the first Canadian bank with its own ETF on the market. Competition is fierce but being among the first Canadian issuers surely helped to build momentum in a growing market. Over the years, BMO concentrated on developing its expertise in capital markets, wealth management, and the U.S. market. BMO also made innovative moves such as the introduction of its own ETFs and a robo-advisor. Growth will happen in these markets for banks in the coming years. BMO is well-positioned to surf this tailwind. Keep in mind BMO’s results are often more hectic compared to its peers due to its capital market business segment. The bank has been the less generous in terms of dividend growth between 2010 and 2020. However, it came back strong with the most generous dividend increase in 2021 (more on that in the dividend growth potential section).

BMO.TO DIVIDEND TRIANGLE

Pros:

  • Focus on capital markets and wealth management: They were the first in the country to have their own ETF suites. They saw where the market is going, and they took advantage of it. They were also among the first Canadian banks to make a move towards private banking with the acquisition of Harris Bank in Chicago. They’re well established in wealth management and in capital market and I like that.
  • Well established in the States.

Cons:

  • Revenue and earnings are more volatile: Because of that focus, their revenue and earnings are more volatile or riskier. Their dividend growth perspective versus the other five is lower.

#3 TD Bank (TD.TO)

Over the years, the bank has been increasing its retail focus, driven by lower-risk businesses with stable, consistent earnings. The bank enjoys number one or two market share for most key products in the Canadian retail segment. TD keeps things clean and simple as the bulk of its income comes from personal and commercial banking. It has substantial exposure in major cities like Toronto, Vancouver, Edmonton, and Calgary, combined with a strong presence in the US. With about a third of its business coming from the U.S., TD is the most “American” bank you’ll find in Canada, with roughly 1/3 of its business coming from south of the border. If you are looking for an investment in a straightforward bank, TD should be your pick as increasing retail focus, large market share in Canadian banking, and U.S. expansion are key growth enablers for TD Bank.

TD.TO DIVIDEND TRIANGLE

Pros:

  • Revenues (a third) coming from the US: They really caught up that game from their southern neighbors; they know how they want to deal; they have a great exposure over there.
  • Largest amount of assets in Canada.
  • Doing things simple but doing them the right way: They have been doing very well for the past 10 years.
  • Strong wealth management: Their segment from Ameritrade did very well, and now they’re selling to Charles Schwab.

Cons:

  • High exposure to mortgages: Hot markets such as Vancouver and Toronto could cool down a lot at one point in time. If we get into a housing bubble, then it’s going to be harder for TD.

#2 Royal Bank – RBC (RY.TO)

Royal Bank counts on many growth vectors: its insurance, wealth management, and capital markets divisions. These sectors combined now represent over 50% of its revenue. These are also the same segments that helped Royal Bank to stay the course during the pandemic. The company has made significant efforts in diversifying its activities outside of Canada and has a highly diversified revenue stream to offset interest rate headwinds. Canadian banks are protected by federal regulations, but this also limits their growth. Having some operations outside of the country helps RY to reduce risk and improve its growth potential. The bank posted impressive results for the latest quarters driven by strong volume growth and market share gains which offset the impact of low interest rates. As interest rates are expected to rise in 2022 and 2023, RY is in good position. Royal Bank exhibits a perfect balance between revenue growth.

RY.TO DIVIDEND TRIANGLE

Pros:

  • Battling with TD to be the largest bank in terms of assets: They’re well established across all of Canada.
  • Rouhly 50% of their revenue are coming from classic banking activities: Which means only 50% is subject to the interest rate squeeze.
  • The other half is about wealth management, capital market, and insurance: They have been able to do lots of cross-selling across those segments, they are maximizing their presence in the wealth management, and they had a huge deal with BlackRock for ETFs.
  • Outperformed the average bank in Canada in terms of market: Recently, they have also shown their strenght in terms of earnings.
  • Strong dividend growth policy in place: Don’t expect any dividend increase for the rest of 2020 from any banks. I’m pretty sure Royal Bank (and other Canadian banks too) will wait a little, see how things go, see how their loan book is being affected, and then they may resume in 2021 or 2022. Still, the dividend is safe.

Cons:

  • Royal Bank could also get hurt by a bearish housing market: This is a rather small downside considering RY’s strenght and ability to face headwinds.

#1 National Bank (NA.TO)

NA has targeted capital markets and wealth management to support its growth. Private Banking 1859 has become a serious player in that arena. The bank even opened private banking branches in Western Canada to capture additional growth. Since NA is heavily concentrated in Quebec, it concluded deals to do credit for investing and insurance firms under the Power Corp. (POW). The stock has outperformed the Big 5 for the past decade as it has shown strong results. National Bank has been more flexible and proactive in many growth areas such as capital markets and wealth management. Recently, NA is seeking additional growth vectors by investing in emerging markets such as Cambodia (ABA bank) and in the U.S. through Credigy. Can it have more success than BNS on international grounds? It looks like they may have found the magical formula to do so!

NA.TO DIVIDEND TRIANGLE

Pros:

  • One of the fastest growing wealth management businesses in the country: They have a very strong brand recognition there. Since they were doing a lot of loans in Western Canada, they actually opened private banking branches there too. Not regular branches where everybody can go, but selling points where private consultants and private bankers could be there for their clients.
  • Strong in capital markets: They’re very active on the market. This creates more volatility, as it is the case with BMO, but overall, they’ve been doing well, and they’re making more money.
  • International branch and US segment: In the international, they focused on Cambodia. They completed the purchase of ABA Bank over there. They’re trying to create growth outside of Canada, but they’ve selected emerging markets in Asia instead of South America.
  • Heavily based in Quebec: In the past, it was a reason to lie a little behind, but over the past 10 years, Quebec has proven its resiliency. They’re not dependent on energy to grow their economy; they have a Canadian economy similar to Ontario. They’re doing well. In the pandemic, Quebec has been hit with a lot of cases, but its economy seems to be on the way to recover faster than the other banks.

Cons:

  • International branch and US segment: We’re going to see how it goes. It’s not my favorite part of their business model but I like the fact that they try to diversify.

Final Thoughts

Canadian banks could be compared to the salt you use in your hearty fall soup. Some salt in it is making it tasty and great. Add too much salt and it is totally ruined. Act with the same caution for Canadian banks. Pick one or two, but don’t add too much in your portfolio!

I know how hard it is to invest when stocks don’t seem to trade at their fair value

Don’t you hate not knowing when to buy or sell stocks? There are too many investing articles contradicting one another. This creates confusion and leaves you with the impression you may not reach financial independence. It doesn’t have to be this way. We have created a free, recession-proof portfolio workbook that will give you the actionable tools you need to invest with confidence and reach financial freedom.

This workbook is a guide to help you achieve three things:

  1. Invest with conviction and address directly your buy/sell questions.
  2. Build and manage your portfolio through difficult times.
  3. Enjoy your retirement.

FREE WORKBOOK

CANOE INCOME FUND (EIT.UN.TO) REVIEW

Canoe EIT Income Fund is a Canadian closed-end investment trust. The investment objective of the Fund is to maximize monthly distributions relative to risk and maximize net asset value while maintaining and expanding a diversified portfolio. In other words, EIT has been created to take your money, manage it, and distribute juicy monthly dividends to help you manage your retirement budget.

What Canoe Income Fund looks like

The Canadian fund includes 54.5% (+8.5% vs last year) Canadian equity stocks, 39.4% (+2.4%) U.S. stocks, 0% (-10%!) cash and 6% (flat) international equity. There are no bonds or other types of fixed income securities. Despite having around 50% of its assets invested in Canadian firms, its sector breakdown is heavily concentrated into financials, energy, and materials (56.2%).

 

Canoe Income fund sector allocation

Source: EIT website

Canoe Income Fund current holdings

*The top 25 equity holdings make up 78.1% of the fund.

They have an impressive diversification of stocks from low yield to high yield with various safe stocks and other quite speculative securities. As you might correctly assume the fund has 30% (down from 35.8% last time we reviewed it in 2021) of its assets invested in energy and the basic materials sectors, and I am not a fan of this type of portfolio. However, it explains why it has been performing well in the past two years (more on that later).

Another interesting point is the amount of turnover in the fund when we compare their top holdings from July 2021. I have highlighted (in green) 8 positions out of 25 (32%) that are not in the top 25 this year.

Canoe previous holdings

*The top 25 equity holdings make up 77.4% of the fund in 2021.

But my opinion does not really matter if the fund helps you retire happily. Let’s look at what does really matter though and that is how the fund’s money has been managed over time and how much you profit (or not) from the management team led by Rob Taylor, CPA, CA, CFA (yes, he needs 2 business cards to include all his titles!).

Performance & Distributions

From their website, we can see that EIT has outperformed the TSX on a consistent basis (which was not the case with 2020 numbers). Their focus on the energy and basic materials sectors clearly paid off over the past 24 months.

Canoe Income fund performance

However, I do not like that they only use the TSX as their benchmark and ignore the S&P 500. With close to 40% of their portfolio invested in the U.S. and 6% in international markets, it seems only fair to include U.S. and international components to their benchmark.

Canoe Income fund asset allocation

Just for fun, I ran the calculations using a portfolio with 54.5% XIU.TO, 39.4% SPY and 6.1% XEF.TO (for international equity) for the past 5 years and 3 years. Results include dividends and are as of 7/31/2022 to match their website.

The portfolio with 54.5% XIU.TO, 39.4% SPY and 6.1% XEF.TO shows a 5-year return 63.13% or 10.28% annualized return. This is much lower than the Canoe Income fund.

Canoe Income fund total return

This is quite interesting as our conclusion in 2021 and 2020 was not the same. The first two times we analyzed the fund, it had underperformed the index portfolios we created. This time, it is quite the opposite. You can see that change occurred around mid-2021 where Canoe started to surge while indexes reached a plateau and eventually decreased in 2022.

The idea of having a high yield investment (EIT.UN.TO pays 10% yield at the time of writing) where distributions are paid monthly is quite interesting. If you reinvest the distribution, you could beat the market, which is quite impressive! Strangely enough, EIT.UN.TO returns are now quite like my personal portfolio.

The lesson here is that conclusions and returns can vary from one year to another. We will review Canoe again next year. The Canoe fund could be an interesting way to generate a high income from your investments. However, if you cash this distribution, make sure you realize two things:

#1 Your capital will not likely grow over time

#2 Your dividend will not likely grow over time

Canoe Income fund distribution

Final Thoughts

Canoe EIT income fund is not the worst investment in the world. In fact, it generated decent returns considering their dividend. While recent performance on the market is impressive, the fund is not perfect. First, do not avoid fluctuations when the market is shaky. If you looked at your portfolio value during corrections, Canoe did not save you from headaches.

Enbridge, Is the 6% Yield Safe?

Summary

  1. Enbridge offers a generous yield (6%), is it safe?
  2. ENB is responsible for about 25% of crude oil and 22% of all-natural gas transportation in North America.
  3. ENB generates substantial cash flow, and management is usually on target with its guidance.
  4. Finally, regulators may not be as enthusiastic as Enbridge is regarding new pipeline projects.

My Investing Thesis

ENB’s customers enter 20-25-year transportation take or pay contracts. This means that ENB profits regardless of what is happening with commodity prices. ENB is also well positioned to benefit from the Canadian Oil Sands as its Mainline covers 70% of Canada’s pipeline network. As production grows, the need for ENB’s pipelines remains strong. Following the merger with Spectra, about a third of its business model will come from natural gas transportation. Enbridge has a handful of projects on the table or in development. It must deal with regulators, notably for their Line 3 and Line 5 projects. Both projects are slowly but surely developing. The cancellation of the Keystone XL pipeline (TC Energy) secures more business for ENB for its liquid pipelines. ENB now has a “greener” focus with its investments in renewable energy.

Enbridge dividend yield

Business Model Explained to a 12 Years Old

What is nice about pipelines is that they are like a toll roads. The only difference is that you have no choice to take that road and pay the toll if you want to travel. The best part is that most Enbridge clients enter in 20-25 years transportation contracts. Therefore, no matter what happens, there are always people paying the toll. The cash flow is easy to predict in the future which leads to steady dividend growth.

Enbridge operates the longest pipeline in North America. The company recently merged with Spectra in order to create an energy infrastructure company. About 2/3 of ENB earnings is generated through oil sand (liquid pipelines) distribution while the other 1/3 is coming from natural gas transmission.

Source: Enbridge

Potential Risks

Stocks do not pay a high yield for no reason. ENB raised its debt and number of shares during the merger with Spectra and the integration of its partners a few years ago. The total long-term debt stands at around $76B (up from $67B in 2017) with no sign of being reduced. It’s time that investors see some debt repayment. As pipelines require significant amounts of capital to build and maintain, ENB may find itself in a position where cash is short. After all, management has plenty of projects to fund, a double-digit dividend growth promise to keep, and larger debts to repay. This could seriously jeopardize ENB’s growth plans. Many pipeline projects have been revised or paused by regulators over the past few years.

Enbridge debt

Dividend Growth Perspective

The company has been paying dividends for the past 65 years and has 27 consecutive years with an increase. Further dividend growth shouldn’t be as generous as compared to the past 3 years (10%/year). Management aims at distributing 65% of its distributable cash flow, leaving enough room for CAPEX. Look to their latest quarterly presentation for their payout ratio calculation. Management expects distributable cash flow growth of 5-7% annually. Therefore, you can expect a similar dividend growth rate. We have used more conservative numbers in our DDM calculation that are more in line with the 2021 and 2020 dividend increases of 3%.

Enbridge safe dividend

An exclusive list of dividend growers with more potential…

Moose Markets presents the Canadian Dividend Rock Stars list: a selection of Canadian companies showing income and growth. You guessed it; we prefer a combination of dividend growth and dividend yield. The Canadian Rock Stars List is a selection of the safest dividend stocks in Canada.

GET THE LIST NOW

Disclaimer: I am long ENB in my Dividend Stocks Rock portfolios.

 

Best Energy Stocks to Buy in 2022

The world needs energy to function and the best energy companies are rewarding shareholders handsomely this year. The oil & gas industry has been fascinating investors for several decades. I guess this is due to the thrill coming from the next exploration results or an oil boom pushing stocks to record levels.

Where to find the best Oil & Gas Energy Stocks?

First, one must understand the differences across sub-sectors and activity types. The oil & gas industry is usually divided into three activities:

Upstream: This term represents all activities related to exploration and production. This is usually the phase where the commodity price is the most important. Companies will establish their financial projections based on a specific price (or cost) per barrel. Then, they will decide to explore (drill wells) or not depending on the likelihood of profitable operations.

Midstream: Midstream activities include the processing, storing, and transporting of oil & gas and their byproducts. This is where you will find pipeline-related businesses. The transportation and storage activities are usually more stable as they usually operate on long-term contracts with producers.

Downstream: this is the final step of the process including refining (to produce gasoline for example) and marketing the product (selling it to the end-customer). Don’t just think about gasoline, but all the other modified products such as liquefied natural gas, heating oil, synthetic rubber, plastics, lubricants, antifreeze, fertilizers, and pesticides

Sub-Sector (Industry)

Oil & Gas Drilling Oil & Gas Midstream
Oil & Gas E&P Oil & Gas Refining & Marketing
Oil & Gas Equipment & Services Thermal Coal
Oil & Gas Integrated Uranium

Energy Stocks Greatest strengths

Oil & gas stocks will raise passions and attract many investors during bull markets (especially after the boom in 2021). As the economy grows, demand for such products increases accordingly. Commodity prices go up, profits are skyrocketing, and dividends are generous. The problem is that it rarely stays that way.

The energy sector can generate great returns in your portfolio, but you will be required to follow this sector closely (and hopefully know what you are doing). If you can pick stocks during oil busts (as was the case back in March-April 2020), you will show double-digit (sometimes triple digit) returns. Since we do not employ a “buy and sell quickly” strategy, we rarely like energy stocks at DSR. They generally make unreliable dividend growers.

Finally, the energy sector is a great hedge against inflation. Along with other commodities, energy companies can easily pass price increases to their customers as it’s linked to supply vs. demand.

Energy Stocks Greatest Weaknesses

The energy sector is quite volatile and cyclical. This is not the best place to pick dividend growers. Many companies will attract investors with their high yield and generous promises, but they will eventually fail their shareholders. I’ve heard the best and the worst stories coming out of this sector. Therefore, it is crucial to do your homework prior to investing in the Energy sector.

The main problem with this sector is it is capital intensive and profits often depend on commodity prices. Companies have little to no control over the prices they receive for their oil or natural gas. Therefore, they spend billions on projects and hope the end price will remain profitable for several years.

Vertically integrated companies (upstream, midstream, and downstream) tend to maintain their dividend payments no matter what, but it is still a risky business. For example, BP (BP) had to cut its dividend after a major oil spill. Royal Dutch Shell (RDS.A or RDS.B) and Suncor (SU.TO / SU) also cut their distributions following the oil debacle in 2020.

As technology evolves, our demand for energy stagnates while our production capacity improves. In other words, don’t expect natural gas prices to rise anytime soon. All factors are combined to keep them at a low level.

How to get the best of it

The energy sector is the most cyclical of all. If you are courageous enough to ride the roller coaster, you can grab shares at highly depreciated prices every few years. If you would rather stay focused on a dividend growth investing strategy as we do here at DSR, you must be incredibly picky before investing a penny in this sector.

I prefer pipelines (midstream industry) as the most interesting opportunity in the energy sector. Pipelines are capital intensive and exposed to regulators and potential oil spills, but they also act as toll roads. The world needs energy and pipelines are the ones providing it.

This sector is more suitable for a growth investor. If you are retired and looking to enjoy a peaceful retirement, you may want to ignore this sector completely.

Target sector weight: Since this sector doesn’t offer the best dividend growers in town, I’d say that a 5% exposure should be enough (unless you like roller coasters!).

Best Energy Stocks to buy in September 2022

As a part of the hype around energy, stocks has faded, there are some great opportunities in this sector.

Canadian Natural Resources (CNQ.TO)

In a world where the West Texas Intermediate (WTI) trades at $75+ per barrel, CNQ would be a terrific investment (here is your cue since the WTI is trading way over $70 lately!). It is sitting on a large asset of non-exploited oilsands and reaches its breakeven point at a WTI of $35. What cools our enthusiasm is the strange direction oil has taken along with the fact that oilsands are not exactly environmentally friendly. Many countries are looking at producing greener energy and electric cars. This could slow CNQ’s ambitions. However, CNQ is very well positioned to surf any oil booms. The stock price has more than doubled in value since the fall of 2020. It has previously invested very heavily, and it is now generating higher free cash flow because of past capital spending. CNQ exhibited resiliency in 2020, and this merits a star in their book. This is also why it’s part of our Canadian Rockstars List!

Canadian Natural Resources Best Energy Stock

Dividend Growth Perspective

On top of an impressive dividend growth streak of over 20 years, CNQ has recently shifted gears with highly generous dividend increases (another 28% in 2022!).  CNQ has proven the resiliency of its business model and confirmed its ability to be a strong dividend grower. This is truly impressive. Now that the oil market has strengthened, CNQ should be able to generate healthy cash flows for years to come.

Enbridge (ENB.TO)

ENB’s customers enter 20-25-year transportation take or pay contracts. This means that ENB profits regardless of what is happening with commodity prices. ENB is also well positioned to benefit from the Canadian Oil Sands as its Mainline covers 70% of Canada’s pipeline network. As production grows, the need for ENB’s pipelines remains strong. Following the merger with Spectra, about a third of its business model will come from natural gas transportation. Enbridge has a handful of projects on the table or in development. It must deal with regulators, notably for their Line 3 and Line 5 projects. Both projects are slowly but surely developing. The cancellation of the Keystone XL pipeline (TC Energy) secures more business for ENB for its liquid pipelines. ENB now has a “greener” focus with its investments in renewable energy.

Enbridge Best Pipeline Stock

Dividend Growth Perspective

The company has been paying dividends for the past 65 years and has 27 consecutive years with an increase. Further dividend growth shouldn’t be as generous as compared to the past 3 years (10%/year). Management aims at distributing 65% of its distributable cash flow, leaving enough room for CAPEX. Look to their latest quarterly presentation for their payout ratio calculation. Management expects distributable cash flow growth of 5-7% annually. Therefore, you can expect a similar dividend growth rate. We have used more conservative numbers in our DDM calculation that are more in line with the 2021 and 2020 dividend increases of 3%. Here’s more about Enbridge’s dividend safety:

Topaz Energy Corp (TPZ.TO)

The company arrived on the market at the perfect moment (2021). Topaz was established through its key counterparty, Tourmaline Oil Corp (TOU.TO), from whom Topaz acquired its formative royalty and energy infrastructure assets in November 2019. Bolstered from this opportunity, Topaz now focuses on growth by acquisition to diversify its business model away from Tourmaline. In 2022, Liquid-rich natural gas royalties (paid by Tourmaline) should represent 50% of Topaz’s revenue. It will also count on conventional liquids royalties (~25%) and revenue coming from its infrastructure (25%). On top of acquisitions, we expect Topaz to exhibit strong organic growth as there are more projects being developed on their land. We appreciate the midstream business infrastructure projects representing 78% of revenues as they are based on take-or-pay contracts. This secures a portion of cash flow and brings more stability to a highly cyclical sector.

Topaz Energy

Dividend Growth Perspective

Topaz is a new company paying a new dividend and that makes it hard to predict what will happen next. The company has already increased its dividend several times, going from $0.21/share in 2021 to $0.26/share in early 2022, for a 24% total increase in less than 12 months. Free cash flow per share continues to increase by double-digits as Topaz surfs a strong oil & gas market. For 2022, management is confident that it will be able to increase its dividend by 8% while keeping its payout ratio within its target range of 60% to 90%.

TC Energy (TRP.TO)

TRP is making use of large amounts of capital to fuel its growth over the coming years. Its acquisition of the Columbia pipeline and its extension toward Mexico are just two examples of what is to come. The company recently funded $4.5B for its Southeast Gateway Pipeline project to compliment TRP’s existing natural gas footprint in Mexico. It enjoys long-term contracts (of an average of 14 years), which provide great cash flow stability over time. The pipepeline’s growth potential remains in its natural gas pipeline expansion. TRP is a good candidate for long-term investment. As is the case with Enbridge, an investor must make sure to track TRP’s rising debt level. The company has kept its focus on rewarding shareholders with generous dividend increases, and that focus should continue. Unfortunately, management revised its dividend growth policy at the end of 2021; it’s still generous, but it’s not what it used to be!

TC Energy Best Natural Gas Pipeline

Dividend Growth Perspective

TRP has successfully increased its dividend annually since 2001. TRP exhibits a 5-year CAGR of 9% but management reviewed its intention to boost its payout by 3-5% CAGR going forward. This news disappointed the market toward the end of 2021. We haven’t changed our DDM calculations as we were already forecasting a 4% dividend growth rate before the announcement. The company’s growth is fueled by its massive investment program. At the current yield, this is a good candidate for a retirement portfolio.

Find Better Stocks on the Canadian market…

There are great stocks to buy in the Energy sector, but there is more on the Canadian market! Moose Markets presents you with the Canadian Dividend Rock Stars list: a selection of Canadian companies showing both income and growth. The Canadian Rock Stars List is a selection of the safest dividend stocks in Canada. Download the list for free here:

Best Canadian Dividend Stocks List

DOWNLOAD THE LIST HERE

  • « Go to Previous Page
  • Go to page 1
  • Go to page 2
  • Go to page 3
  • Go to page 4
  • Go to Next Page »

Success! Now check your email to confirm your subscription.

There was an error submitting your subscription. Please try again.

Copyright © 2023 · Moose Markets