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bnn market call

Steve DiGregorio is a portfolio manager at Canoe Financial. His focus is Canadian dividend-paying stocks.

Top Picks:

Morneau Sheppell (MSI-T)

The company is a leading human resources consultant, now growing in the United States. With mid- to high-single-digit revenue growth and a 4.5-per-cent dividend yield, it fits for income investors looking for growth and yield.

Ten Peaks Coffee (TPK-T)

The leader in organic non-chemical decaffeinated coffee, ready to take advantage of the growing trend towards high-quality coffee shops.

ZCL Composites (ZCL-T)

The leader in non-corrosive storage tanks for the gas station industry. The environmental negatives from historic steel tanks are driving demand for ZCL's environmentally friendly products.

Past Picks: Sept. 11, 2015

Restaurant Brands International (QSR-T)

Then: $49.50 Now: $54.69 +10.48% Total return: +11.72%

Manulife Financial (MFC-T)

Then: $20.35 Now: $19.52 -4.08% Total return: -1.31%

Brookfield Canada Office Properties (BOX.UN-T)

Then: $24.71 Now: $28.95 +17.16% Total return: +28.16%

Total Return Average: +12.86%

Market outlook:

It's time to reduce interest rate exposure in your Canadian dividend portfolio.

We have seen very strong returns year-to-date in the traditional dividend sectors, with utilities, REITs and telcos returning 12.6 per cent, 15.9 per cent and 14.8 per cent, respectively. These strong returns have been driven by asset value appreciation, given the benign rate environment. These sectors are now trading near peak valuations, and are at risk should we begin to see rates tick higher. We are seeing better value in the portion of the dividend yield universe which is "yield plus growth." As 80 per cent of the TSX members pay a dividend, we would recommend investors focus on the companies with higher earnings growth, which could mean a smaller portfolio yield, but less downside in a rising rate environment. In addition, we would be sellers of covered calls to enhance portfolio yield.

With the TSX and S&P 500 trading relatively in-line on forward valuations (approximately 15.7 times), we see better earnings growth in Canada, and potential for positive earnings revisions. With many analysts' price decks using oil assumptions below current prices, this implies the TSX valuation is lower than the S&P.

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