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Five Canadian investments you can rely on right now

One of Canada’s top analysts gives us five criteria for picking sound investments in today’s market — and five investments that fill the bill.

You could have picked up some great advice on investing in Canada this winter in Orlando, Florida. And not at Snow White’s Scary Adventures, either. This happened at the modestly named World Money Show.

There, one of Canada’s best-known analysts was telling a largely American audience that Canada continues to have some very solid investments to offer. If you couldn’t be there, we can still take you there through the pages of The MoneyLetter. The speaker was Mr. Gordon Pape.

Faced with a high-powered battery of U.S. investment gurus, Mr. Pape felt it was incumbent upon him to let them know that are still “some pretty good, low-risk, high-yield opportunities to be found on the TSX.”

As far as many a U.S. investor is concerned, the income trust tax handed down by Finance Minister Jim Flaherty sixteen months ago dealt a critical, if not fatal blow to investment prospects in Canada.

Not so, said Mr. Pape, who proceeded to regale his American listeners with some solid advice on investing in Canada. And if American investors are encouraged to put more money into Canadian stocks as a result, so much the better for Canadian shareholders.

Yield vs. risk

The specific forum Mr. Pape was hosting was entitled “High Yield Without High Risk.” So when he outlined his five criteria for solid investments in today’s troubled climate, he started with dividend yield. Specifically, with what degree of yield is good for you.

The general principle, of course, is the greater the yield, the greater the risk. Yield is relative, says the analyst. “So it was a matter of striking a balance.” He could have recommended a selection of securities with yields above 10 per cent, but then you’re up in high-risk territory.

The second criterion was downside risk. “I am very uncomfortable with the current investment climate and the potential dangers still lurking. So I decided to focus on securities that I believe will hold up well even if markets tank.”

Liquidity is number three. “There are many decent-quality, high-yield securities available in Canada. But some of them are thinly traded, and many American investors could acquire them only over the counter,” Mr. Pape says. So, he stuck to highly liquid stocks — three of them trade on the New York Stock Exchange as well as the TSX. Can’t get much more liquid than that.

Growing dividends, growing companies

Naturally, a healthy yield demands a healthy and growing stream of dividends. “I focused on securities that have a good history of dividend increases,” says Mr. Pape. “Some of the yields may not look exciting right now, but the track record of these companies suggests they will rise quickly for shares purchased at today’s purchases.”

The fifth and final benchmark for Mr. Pape was growth potential. “Although the theme was high yield,” he explains, “the fact is that a company that is not growing will not be able to continually increase its payouts.”

Putting these five criteria to work, the analyst selected four stocks and one income trust that promise to keep pumping dividends, or distributions, into the hands of their shareholders at attractive yields.

Collateral damage equals opportunity

First up is the smallest of our big five chartered banks. Bank of Nova Scotia (TSX-BNS), notes Mr. Pape, is also a standing recommendation of two of his colleagues on The MoneyLetter, Dr. Michael Graham and Mr. Richard Croft.

That means three of Canada’s leading analysts have the bank at or near the top of their to-buy lists. “It is regarded as the most conservative of the group,” says Mr. Pape, “with a top-level management team.”

In fiscal 2007, Scotiabank reported a return on equity of 22 per cent. Earnings were up 13 per cent from the year before, and the bank paid $1.74 per share in dividends for a payout ratio of just over 43 per cent.

Despite these excellent results, the share price has been trading well below its 52-week high: at one point in January, it was off more than 20 per cent. “That’s fallout from the subprime crisis,” states Mr. Pape, “and even though it does not appear that Scotiabank has significant exposure, it has been the victim of collateral damage in terms of share price.”

This represents “a great entry opportunity,” says the analyst. The annual dividend was recently raised to $1.88, which makes the yield at 3.8 per cent based on today’s share price.

The case for the oil sands

Canadian Oil Sands Trust (COS.UN) is one of Canada’s biggest trusts, and one with a very long horizon: its reserves have an estimated shelf life of some 33 years. It is a long-time recommendation of another of the analyst’s MoneyLetter colleagues, Mr. David West, one of Canada’s leading experts on income trusts.

The case for investing in the oil sands continues to be compelling, says Mr. Pape. “Sure, there are problems, like rising costs and environmental concerns. But it’s going to be a long, long time before North America is weaned off petroleum. In the meantime, the oil sands will play an ever-larger role in supplying the energy-hungry U.S.”

Not long ago, the trust raised its quarterly dividend, or distribution, to $0.75 a unit. The price jumped and so did the yield, which now stands at 7.2 per cent, well above its normal range of 4 to 5 per cent. “That suggests continued price escalation,” says the analyst, “so get in while you can.”

The next stock may not appeal to all investors, for ethical reasons.

Sin stock with more bang for the buck

Rothman’s Inc. (TSX-ROC) is Canada’s second largest cigarette company. This may make it “anathema to many investors,” admits Mr. Pape. “However, my job is to bring opportunities to your attention. You provide your own moral compass.”

The stock does meet his criteria for high yield without high risk. “Despite the decline of smokers in this country, the company continues to report good revenue growth and is expected to earn $1.60 a share this year.” The quarterly dividend of $0.35 produces a yield of 5.5 per cent.

By comparison, the yield for Altria Group (NYSE-MO), the holding company for U.S. tobacco giant Phillip Morris (which is about to be spun off to shareholders) returns 4 per cent. “If you are going to own a sin stock,” Mr. Pape tells his American audience and Canadian readers alike, “Rothmans will give you more bang for your buck.”

We are bound to report that the next stock has received a number of thumbs-up reviews lately in the advisories we consult.

A mind-boggling network

TransCanada Corporation (TSX-TRP) is another favourite of Dr. Michael Graham, reports Mr. Pape. It has a number of interests beyond its pipeline business, including a partnership in the Bruce Power nuclear plant in Ontario.

The pipeline network “extends for a mind-boggling 59,000 kilometres,” says Mr. Pape, “all the way from northern Alberta to the Maritime provinces, down the West Coast to Northern California, through the U.S. Midwest to Chicago, and as far south as the Gulf of Mexico.” That’s longer than Route 66. And new projects will push it to the Arctic Ocean.

As with the oil sands, “Canada is going to be an increasingly important energy supplier to the U.S. in years to come. A lot of that product will be moved through the TransCanada system.”

For a regulated utility, TransCanada showed pretty nice growth in fiscal 2007, with a five per cent rise in net income. While company shocked its investors several years ago by cutting the dividend during a financial squeeze, “those days are long past,” says the analyst.

The dividend has gone up for eight consecutive years. It now stands at $0.36 a share ($1.44 annually), for a yield of 3.6 at the current price.

A very boring company

Mr. Pape quotes an Alberta broker: “After you’ve finished work in the oil sands, there’s not much to do on an Alberta winter night except watch TV.” Which is good for Shaw Communications Inc. (TSX-SJR.B). Mr. Pape describes it as “a very boring company with a very profitable and low-risk business: satellite and cable TV.”

Shaw has a near monopoly in the booming western Canadian market. Conservatively run by the Shaw family, it offers digital phone service, but “has steered clear of the treacherous wireless waters, and analysts hope it avoids the temptation to participate in the upcoming wireless auction being held in Ottawa.”

It has sold off its broadcasting assets, so it is not a western clone of Rogers Communications. “Think of it as a dowdy cousin living in a rich family,” says Mr. Pape.

What you’re getting, he adds, is a company with a solid base, steadily growing revenues, limited downside risk, good cash flow and a respectable yield. “If you want excitement on top of that, look elsewhere!”

What all this boredom gives you, among other things, is one of the few companies that makes monthly payouts. So every month investors get dividends worth $0.06 per share ($0.72 annually), for a yield of 3.5 per cent.

Now is a good time to hook up with Shaw. Canadian telecoms took a hit in January, and Shaw’s shares fell 18 per cent before investors came to their senses, says Mr. Pape. They’re still trading well below their 52-week high, so “take advantage of this one while it’s still on sale.”

Mr. Pape has one more suggestion for those who seek safety above all. In December, he recommended that readers in The MoneyLetter consider bonds or bond funds for their portfolios. “So far, anyone who did so has reaped the benefits, not so much in terms of big profits but by protecting assets.”

The iShares CDN Government Bond Index Fund (TSX-XGB) has been the safe haven Mr. Pape predicted it would be. It gained a modest 1.4 per cent since his December recommendation, which is “a lot better than a stock market loss.”

In the meantime, some well-heeled American investors have gotten the good word on Canadian investments that are low on risk and high on cash flow. And looking at the value of the dollar, it’s a pretty good time to get a hold of some Canadian cash.