MIDDLEFIELD CANADIAN INCOME: Trust channels 5% dividends from Canadian oil and banks

Canada isn’t usually on the radar of UK dividend seekers, but Dean Orrico of fund management house Middlefield thinks it should be.

He says the country’s rich mix of energy suppliers, real estate companies and major banks should provide abundant dividend income now and in the future.

Toronto-based Orrico has managed the £109 million Middlefield Canadian Income Trust since its launch in 2006. While the fund, listed on the London Stock Exchange, can invest up to 40 percent of its assets in US equities, Orrico currently chooses to avoid them. His opinion is that the income opportunities in Canada are much better.

“Canada is an income-friendly market,” says Orrico. Most companies generate stable dividends. This allows us to generate an annual income for shareholders of around five percent, plus the prospect of future income and capital growth.”

Over the past five years, the fund has achieved a total return of 40 percent. Last year it paid a dividend of 5.2 pence per share, with the shares currently trading at around £1.06. This year’s first two quarterly payments of 1.3p per share are higher than last year’s equivalent payments of 1.275p.

The fund consists of only 35 stocks, more conviction than high concentration. “No company represents less than one percent of the portfolio,” he adds. “But at the other end of the scale, we try to limit our exposure to one stock to no more than five percent. This enables us to manage the total risk of the trust.’

The economic background in Canada is much better than in the UK or the US. While interest rates are similar to those in the UK, they are likely to have peaked. Meanwhile, inflation continues to rumble at only 3.4 percent.

A major reason for the lower inflation is the country’s advanced immigration system, which results in 500,000 people gaining permanent residency each year. ‘They all bring specific skills to the labor market,’ says Orrico, ‘and they all help to control wage inflation in the labor market.’

The fund is mainly built around three pillars: energy, real estate and banks. Canada is a net exporter of oil, natural gas and electricity – and a leading producer of key metals such as aluminum, cobalt, gold and uranium.

One of the fund’s top holdings is Enbridge, an oil and gas pipeline operator heavily involved in the construction of a facility in Squamish, British Columbia, that will enable the export of liquefied natural gas to Asia.

Orrico says the company offers investors a predictable and growing dividend.

On the real estate front, a dire shortage of new buildings is driving up rents for tenants. While some provinces in Canada impose rent controls on landlords, some real estate companies compensate by raising rents as tenants move out and new ones move in.

An important trust holding company is Canadian Apartment Properties, which according to Orrico produces a steadily increasing dividend.

Banks, the third pillar, represent one fifth of the portfolio’s assets. While there are well-known names among his holdings, including Bank of Montreal, Orrico says sentiment remains fragile due to the troubles earlier this year in the US regional banking sector. This led to Canadian banks having to hold more capital.

“Compared to the market, we are underweight in this sector,” he says. “But maybe sentiment will improve once there are no more bank collapses in the US.”

The trust’s exchange identification code is B15PV03 and the ticker MCT. The annual costs total 1.7 percent.