A&W’s sales and distributions have been on the rise.Laura Leyshon/The Globe and Mail
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Sold in May and gone away? Pity, I would say
This may be the fashionable time of year to rotate into cash, but markets aren't succumbing to those historical trends – at least not just yet.
Markets typically underperform during the six-month period from May to October. Yet, the TSX rose above the 14,000 threshold this past week, the highest since the steamy days of last August. Those dividend-rich financials and energy stocks led the way, thanks to a round of relatively pleasing earnings reports from the banks and an oil price that took a stab at reclaiming $50 (U.S.) a barrel. Year-to-date gains for the TSX are up an impressive 8 per cent.
And it wasn't just in Canada where the bulls were running loose. Global markets overall were up by more than 2 per cent this past week. It might all seem a bit odd coming at a time when strategists and Federal Reserve leaders are leaving little doubt the U.S. will soon hike interest rates – maybe even once or twice this summer. But recent U.S. data suggest the economy can handle it, and oil's climb out of the abyss has dampened deflation risks. Across the pond, polls have recently moved in favour of the "remain" side in the Brexit debate, the favoured outcome for European equities.
Don't rest too easy. Bears are sure to feel vindicated before too long. Valuations are looking stretched, the oil price rebound hasn't been entirely convincing given short-covering has been a key influence, and the U.S. presidential election – a strange one if ever there was one – is just around the corner.
Whatever comes, we're happy to present this new newsletter to help navigate the increasingly complex and noisy world of investing. Delivered to inboxes every Tuesday and Friday night, our aim is to arm active investors with fresh ideas, insight and stock picks. Click here to let us know how we're doing.
Three big numbers to note
18.9 Price-to-earnings of the S&P/TSX Composite index based on 2016 analyst estimates. Five-year average is 15.4.
34% The odds indicated by futures of a Fed interest-rate increase in June.
-7.1% Decline in U.S. first-quarter earnings, based on current analyst estimates. The Street had predicted a 10 per cent decline in April.
Stock picks from the Street
Brookfield Infrastructure Partners LP. John Heinzl added Brookfield to his Strategy Lab model dividend portfolio a year ago, and says the future still looks bright for this global infrastructure player, whose assets includes railways, ports, utilities, toll roads, pipelines and communications towers. The total return – a theoretical measure that includes distributions and assumes they were reinvested in additional units – was 8.8 per cent, which beat the total return of negative 6.2 per cent for the S&P/TSX composite index over the same period. The units yield an attractive 5.3 per cent.
ZCL Composites Inc. Shares of this Edmonton-based energy services company, which makes fibreglass storage tanks for petroleum, water and corrosive liquids, are up by 15 per cent over the past year and 25 per cent per cent so far this year. Analysts are expecting the stock to rise at least another 10 per cent over the next 12 months. A rapidly rising dividend – now yielding 3.8 per cent – plus share buybacks and a special dividend paid out in March have made the stock even more attractive, reported Brenda Bouw.
Algonquin Power & Utilities Corp. Many high-yielding securities have rallied sharply, so identifying high-yielding securities trading at a reasonable valuation with room to expand is a challenge. However, there is one security with such qualities: Algonquin Power & Utilities Corp. Our in-house equities analyst Jennifer Dowty suggests accumulating shares using a strategic approach could reap investors an attractive total return over the next year.
The Rundown
Worthwhile investing stories and videos from around the web
A juicy A&W
The hamburger chain has raised its distributions three times in the past year, reports John Heinzl in his Yield Hog video. It's tasty for customers and investors alike.
Nothing but 'dead money'
Doubleline Capital founder Jeffrey Gundlach took over the "Bond King" mantle after Bill Gross moved to Janus Capital, and Mr. Gundlach keeps saying more and more incendiary things about equity markets. Earlier this week he said that the rally in U.S. stocks, which began on Monday, feels like a short squeeze and characterized U.S. stocks as "dead money."
Don't believe the hype
Jim Cramer is the stock picker whose frenetic Mad Money took the dry world of stock-picking and transformed it into a cable-TV carnival. Then two Wharton School grads studied his investments and concluded that his "stock picks stink." Not so fast, writes David Milstead. He takes a closer look at the data and comes out with a different conclusion.
Dividends don't mean diversification
If you bought a dividend ETF and thought you were getting a diversified basket of dividend stocks, think again, says Rob Carrick. Most Canadian dividend-doling-out companies are either in energy or finance.
Market likes short shorts
Short positions on Bombardier's Class B shares surged to 53.1 million shares from 44.9 million, an escalation of 18 per cent, writes Larry McDonald. He also notes investors are increasingly betting against TSX energy stocks as they continued to climb.
Real estate too expensive? Look to a REIT
Do you want to buy an investment property but find the Canadian real estate market overheated? There's a liquid option to buying a brick-and-mortar property: Canadian real estate investment trusts. Morningstar's Ian Tam has screened REITs that show the best combination of dividend yield, funds from operations, and other key metrics.
Shorting the banks
Canadian investors love their banks, but international investors are more pessimistic. The banks' resilience in the face of slumping energy prices, wild real estate markets and a falling loonie rewards domestic investors. But short positions by non-Canadian funds have ballooned as they see a different view. Scott Barlow foresees a short squeeze on the way.
The oversold and overbought
As long-time readers know, the relative strength index is one of the technical signals favoured by our market strategist, Scott Barlow. And right now, it suggests the S&P/TSX Composite index is getting close to a sell signal. So far, as Scott notes, only one Canadian bank is officially in overbought territory.
Ask Globe Investor
The Question: I have a question regarding "withholding taxes" on dividends paid in a U.S. trading account. Is there a form or line to get credit for these when filing my Canadian income tax return?
The Answer: If you hold U.S. stocks in a non-registered account, 15 per cent of the dividend will be withheld at source. You can claim this amount as a foreign tax credit on line 405 of your Canadian return to offset other taxes payable. The net result is that you will pay tax at your marginal rate on U.S. dividends.
More information is available on the Canada Revenue Agency website and on Taxtips.ca.
You can avoid withholding tax on U.S. dividends by holding your U.S. stocks in a retirement account such as a registered retirement savings plan, registered retirement income fund or locked-in retirement account. If you hold U.S. stocks in a tax-free savings account or registered education savings plan, however, the 15-per-cent withholding tax still applies and you cannot claim it as a foreign tax credit.
-John Heinzl
Do you have a question for Globe Investor? Send it our way via this form. Questions and answers will be edited for length.
Investing quote of the day
"While the U.S. economy can handle a gradual normalization of monetary policy in the U.S., the rest of the world cannot do so." -- Ed Yardeni at Yardeni Research Inc.
What's up in the days ahead:
Monday would be a good day to kick off early from trading platforms to enjoy a few extra Z's. It's Memorial Day in the U.S., and that means a slowdown in market volumes worldwide, including here in Canada.
Markets will return to a higher gear on Tuesday, when the Bank of Nova Scotia becomes the last of the Big 5 banks to report fiscal second-quarter earnings. It's been an overall upbeat earnings season so far for Canadian banks relative to expectations, but Scotiabank has a mixed track record when it comes to pleasing the Street. It's beaten expectations on adjusted earnings in four of the past eight quarterly earnings reports (and six out of eight times on revenues). Analysts this time around, on average, are expecting adjusted earnings per share of $1.42 on revenues of $6.501-billion.
There'll be much further debate on what the Fed has in store for monetary policy the summer (one rate hike? Two? A postponement?). The biggest clue of the week may come Friday with the U.S. jobs report for May. Read much more about what to expect next week in our handy earnings and economic calendar here.
If a trip to Tim Hortons is on your agenda next week, you'll want to put Jennifer Dowty on your reading menu as she profiles Restaurant Brands International on Monday. A positive outlook on dividend hikes will be served up. And look for our index investing guru Andrew Hallam to illustrate why retirees may be able to live well by withdrawing 4 per cent from their portfolios per year – assuming those nasty fees don't get in the way.
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Darcy Keith