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The share that taps into high yields from North
America, at a 13pc discount
Vancouver: Canada is known for a culture of strong corporate governance
By Richard Evans 13 April 2017 • 8:41am British investors have historically been great fans of equity income funds, into which they have
ploughed tens of billions of pounds.
Questor, in its Trust Bargains and Income Portfolio guises, has tipped several of them and
believes firmly in the concept.
But there is one risk to which UK equity income funds are particularly exposed: the fact that the
British dividend pool as a whole is dominated by a small number of very large companies.
In fact, just 10 firms account for half of the dividends paid by FTSE 100 constituent companies.
If any of these groups is forced to cut or suspend its dividend, the effect will be significant. By
contrast, the top 10 dividend payers across the world account for only 10pc of total global
payouts, according to the Henderson Global Dividend index. The latter thus present far less risk.
This is not to say that all UK equity income funds rely on a handful of giant dividend payers:
some diversify into small and medium-sized companies.
But there is another way to avoid the problem: buy funds that invest beyond British shores.
One little-known trust that has caught the eye of professional investors seeking to generate
income is the Middlefield Canadian Income investment trust.
Seeking income from North American stocks is itself somewhat unusual. US-listed companies
have in general lower yields than their British and European counterparts and many prefer
buybacks as a form of shareholder reward rather than dividend distribution.
As a result, investment trusts which target income from the region are unusual. Analyst
Winterflood says of a total of eight trusts focused on North American stocks just three are
explicitly income-oriented. Middlefield is one of these.
“Canadian firms have a strong dividend tradition,” said Richard Hughes, who co-manages the
M&G Charifund, an open-ended portfolio designed for charities, and which has a stake in the
Middlefield trust.
“There is also a culture of effective corporate governance in Canada. I’m a strong believer in the
Canadian economy. I can’t see any reason why this would change.”
He said Middlefield’s portfolio managers had a strong record of outperformance.
“They do their homework on stocks and pick more winners than losers,” he said.
The emphasis is on stocks whose yields are high “without being so high that the market is
signalling their unsustainability”.
“There is also a culture of
effective corporate
governance in Canada. I’m
a strong believer in the
Canadian economy. I can’t
see any reason why this
would change”
The trust currently pays a dividend of 5p a share, which at
today’s share price equates to a yield of about 5pc – 40pc
higher than the average of the UK stock market. Mr
Hughes said he regarded this income as secure and likely
to rise over the next year or two.
The trust has, however, delivered no capital growth to
shareholders since it listed just over 10 years ago, even
though the value of its assets has risen. This means of
course that the trust is now trading at a discount, currently around 13pc.
This “discount” – the gap between the share price and the higher value of the underlying assets –
has been widening over the past five years. Indeed for much of 2012 the shares were so much
more popular that they traded at a “premium”, or above asset value.
“This discount won’t last for ever,” Mr Hughes said. “Sooner or later something will happen,
such as a rise in the dividend. This level of discount is unsustainable in the long term.
“I see the trust as very attractive to investors who need to grow income. But it will also grow
capital for patient investors who reinvest their dividends – income investing is a ‘tortoise’
strategy that proves really powerful over time.”
Questor sees the “ongoing” annual charge of 1.25pc as fair for a specialist fund of this type.
In 2015 the trust’s board won shareholder permission to widen its mandate slightly, increasing
the maximum proportion of US holdings from 20pc to 40pc of the portfolio.
This has given the portfolio managers greater flexibility. Around 74pc of the portfolio is invested
in Canadian shares. Core divi-paying holdings include Royal Bank of Canada and Bank of Nova
Questor says: buy
Ticker: MCT