A 21% discount to NAV (net asset value) Middlefield Canadian Income Trust (MCT) presents exciting potential upside for investors. Focused on generating high income from great Canadian businesses, this trust has faced a headwind from rising rates and has posted a negative one-year share price total return of 12.6%.

However, the fund has returned 32.4% over five years and managers Dean Orrico and Rob Lauzon now see a ‘generational’ opportunity to buy Canadian dividend stocks, which trade at big discount to US peers despite offering sustainably growing dividends with
well-covered yields.

Investors are being paid an attractive 5.4% dividend yield while they wait for a double whammy from a sharp re-rating of portfolio
stocks in rate-sensitive sectors including real
estate, utilities and pipelines, combined with a narrowing of the discount.

This is an interesting time to put money to work in Canada, a net exporter of oil and natural gas blessed with an abundance of critical materials ranging from potash to uranium, aluminium and gold. Equities in Canada, where high immigration is driving economic growth, are at trough valuations as rising rates have caused its dividend paying companies to lag growth stocks in 2023.

Inflation in the North American nation is among the lowest in the G7 and with central bank tightening coming to an end, Orrico reckons the scene is set for Canadian shares to outperform
US equities. The peak in short term rates should prove particularly positive for the value sectors in which Middlefield Canadian Income invests including real estate, financials and utilities.

Middlefield Canadian Income’s unwavering focus is on stable, profitable, robustly financed companies paying high dividends and despite the global shocks of the past five years, portfolio dividend growth has worked out at 8.9% per year with 88% of the fund’s portfolio companies increasing their dividend over this period.

Orrico says Canadian banks have suffered from negative sentiment but are poised to rebound in the first half of 2024 and offer dividend yields averaging 5.7% supported by low payout ratios and high capital reserves.

Canadian REITs are trading at discounts comparable to the lows seen during the Covid pandemic and Great Financial Crisis, despite benefiting from growing demand and constrained supply.

The managers also say momentum is building in the Canadian energy sector, where companies are returning record distributable free cash flows to shareholders through dividends and buybacks.

The main drawback of the quarterly dividend paying trust is an ongoing charge which is a little on the high side at 1.34%. [JC]

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