Ryan Bushell, president and portfolio manager, Newhaven Asset Management

FOCUS: Canadian dividend stocks 

MARKET OUTLOOK:

Markets have started the year on a positive note as the hotly anticipated recession remains fashionably late. Much of the positivity in markets stems from a “soft landing” economic narrative coinciding with an anticipated significant drop in interest rates in late 2023 to early 2024. We may indeed get one of those two positive outcomes, but getting both is a stretch in my view and it could also be neither.

Interest rate increases operate with a lag and the cycle we embarked on less than a year ago was the second most aggressive in modern history. It will take time for the gravitational pull of higher rates to slow the economy but it is a matter of when not if. 

Labour, energy and food inflation have cooled but are still running well ahead of personal income growth on a three-year basis. This will squeeze corporate profitability and consumer spending alongside higher debt service costs. I remain very patient with client cash balances which are in the five to 10 per cent range in most cases and continue to prefer infrastructure and energy providers for the largest part of portfolio allocations. Cash balances now earn ~four per cent providing ample return to compensate while we patiently watch the next few months unfold, a dramatic improvement year over year.

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TOP PICKS:

ARC Resources (ARX TSX)

Arc Resources is down ~22 per cent since early December as mild weather has caused a collapse in benchmark natural gas prices. This drop is more than warranted given Arc’s significant condensate production which has a captive audience of oil sands producers and trades at a premium to benchmark oil prices. Additionally, Arc owns a significant infrastructure position that benefits from lower gas prices and finally, the company stands to benefit significantly from the completion of LNG Canada in terms of additional volumes and more stable pricing. The shares are very attractive anywhere below $16 in my opinion.

Telus (T TSX)

Telus declined fairly significantly from its peak in early 2022 and I am not sure why. The company is out ahead of the pack on its capex cycle, has hidden value in some of its technology investments and will continue to see strong subscriber loading with ongoing population growth from immigration. The shares yield nearly five per cent and the company is increasing its dividend more aggressively than any other telco. Parking some capital in Telus below $30 with a five-year time horizon in an uncertain environment seems like a prudent way to protect and grow capital.

Enbridge (ENB TSX)

Relatively simple thesis here, 6.5 per cent dividend yield while you wait for incremental demand for Enbridge’s infrastructure capabilities to materialize. Dividend growth will be modest as the company de-levers and there is little if any regulatory risk in the foreground at present. Not terribly exciting but a relatively solid value proposition in an uncertain world.