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Strategists at CIBC World Markets and RBC Dominion Securities are becoming more upbeat about the energy sector, even as the price of crude oil has stalled in recent trading – providing a potential entry point for latecomers.

Ian de Verteuil, head of portfolio strategy at CBC World Markets, upgraded the Canadian energy sector to “overweight” this week — at the expense of financials, which were downgraded to “market weight” – noting that the shares of Canadian energy stocks have been lagging the price of oil, which should remain high amid strong demand and tight supply.

Sure, some of this lag is due to pipeline constraints and a negative perception of the Canadian oilsands among some international investors. But still, the gap between oil prices and energy stocks is too wide to ignore: The S&P/TSX energy index is where it was in April 2016, while oil prices are up at least 50 per cent.

Mr. de Verteuil prefers oil producers over pipelines, which are vulnerable to rising interest rates. He added Encana to his recommended list of energy stocks, joining Suncor Inc, Canadian Natural Resources Ltd and Vermilion Energy Inc.

Lori Calvasina, head of U.S. equity strategy at RBC Dominion Securities, said that the arguments supporting her previous “overweight” recommendation on energy stocks have only strengthened over the past several months, as geopolitical risks rise, money flows into energy-focused exchange-traded funds and energy stocks post impressive profit and revenue growth.

“Historically, the sector tends to outperform when Value beats Growth (a style shift that tends to happen late in bull markets), and when inflation expectations and interest rates rise,” Ms. Calvasina said in a note this week.

Though her focus is on U.S. stocks, her bullish ideas should reward energy companies on this side of the border as well.

-David Berman, Globe and Mail investment writer

This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you, you can sign up for Globe Investor and all Globe newsletters here.

Stocks to ponder

North American Construction Group Ltd. (NOA-T). This small-cap stock has rallied 34 per cent year-to-date and analysts are forecasting an additional 27 per cent gain over the next year. Alberta-based North American Construction Group, or NACG, is a construction and mining contractor, which services energy and resource companies. Jennifer Dowty reports (for subscribers).

Shopify Inc. (SHOP-T). Shopify Inc. is the second-best-performing stock in the Canadian benchmark index this year, rewarding investors who have bet on a good growth story but also raising concerns about the stock’s valuation. How long can Shopify continue to dazzle? The shares, which recently rose above the $200 threshold in Toronto, are now up a total of 870 per cent since their debut in 2015. They have rallied 68 per cent this year alone, surpassing all but MEG Energy – up 75 per cent – in the S&P/TSX Composite Index. With this sort of performance, it’s little wonder that the company – which develops and sells software to assist online merchants − is attracting a lot of attention. David Berman reports (for subscribers).

The Rundown

This could be the biggest threat yet to the nine-year-old bull market

Wall Street’s nine-year-old bull market has survived Washington dysfunction, euro zone crises and global trade frictions. But now it faces what could be its biggest threat of all - one of the lowest unemployment rates in recent history. Granted, that sounds odd. Extremely low unemployment is generally considered a fine and noble thing. And so it is – except where the stock market is concerned. Ian McGugan explains (for subscribers).

These stocks yield more than 5 per cent – and raise their payouts

Cheer up, dividend investors. Sure, many dividend stocks have been clobbered by the recent surge in interest rates. But look on the bright side: If you’ve got cash to invest, your money will go that much further. Not only will you be able to earn a higher yield, but John Heinzl argues that many dividend stocks are actually safer now than they were six months or a year ago. He takes a look at three stocks looking particularly attractive right now. (for subscribers).

How a $3-billion Mawer fund manager has generated 14.8% annual returns over the past decade

When it comes to the global small-cap mandate he oversees, Christian Deckart isn’t ignoring the macroeconomic environment, including risks from the reduction of quantitative easing from central banks and rising interest rates, but it’s not driving his decisions. “We think micro, but worry macro,” says the deputy chief investment officer at Mawer Investment Management, who has about $3-billion in assets under management. His return was about 10.7 per cent year-over-year as of June 1 and 14.8 per cent annualized over the past 10 years. The Globe and Mail spoke with Mr. Deckart recently about some of the international small caps he’s been buying and selling and one he exited too soon. Brenda Bouw reports (for subscribers).

Three stocks on the rise that investors should pay attention to

Often an investor will ignore a stock just because it is ‘up’. This can be a costly mistake as a rising share price usually means things are going well in the underlying business and may continue to do so as markets wake up and adjust to what is happening. Ryan Modesto looks at three companies whose share prices are on the rise and thinks should not be ignored by investors.

Top Links (for subscribers)

Cryptocurrencies, housing prices and the ‘fraud cycle’

Top stock picks to benefit from expected $70-trillion in clean energy, climate change investment

Others (for subscribers)

Thursday’s analyst upgrades and downgrades

Thursday’s Insider Report: Companies insiders are buying and selling

Wednesday’s analyst upgrades and downgrades

Wednesday’s Insider Report: Four companies insiders are selling

Others (for everyone)

Warren Buffett, Jamie Dimon push for end to quarterly earnings forecasts

Marijuana is the new beer as pot growers look to drinkable weed

Valeant investors betting on comeback drives shares to 2016 high

A $220-billion manager says 2018 is good year for stock pickers

Smart-beta glut has ETF issuers pivoting from stocks to bonds

Twitter marks S&P entry with $1-billion trip to debt market

Number Crunchers (for subscribers)

Strategy captures profitable companies trading under the radar

Ask Globe Investor

Question: From a tax perspective, which is better in a non-registered account – return of capital or eligible dividends?

Answer: As I’ve written before, you will almost always earn the highest after-tax return by investing in a registered account such as a registered retirement savings plan or tax-free savings account. However, if you have maxed out your RRSP and TFSA, investments that pay dividends or return of capital both have advantages in a non-registered account.

Which is more advantageous depends on factors such as on one’s income level, both now and in the future, and the yield and projected returns of the investments in question.

The main benefit of return of capital (ROC) is that it’s not taxable – at least not immediately. Instead, ROC is subtracted from the adjusted cost base of the investment. This results in a larger capital gain – or smaller capital loss – when the investment is ultimately sold. Deferring tax is an advantage, especially if the investment is sold in a year when one’s income is low. Another advantage of ROC is that capital gains are effectively taxed at half the rate of other income. (Note: ROC does become taxable, as capital gains, once the adjusted cost base of an investment falls to zero.)

Eligible dividends from Canadian companies are are also taxed favourably, thanks to the dividend tax credit. In fact, at very low income levels – less than $46,605 for an individual living in Ontario, for example – the effective tax rate on eligible dividends is negative. The government won’t send you a cheque for the negative tax, but you can use to it to offset other taxes payable.

The marginal tax rate on dividends rises gradually as income increases, but it remains below the effective tax rate on capital gains until income reaches $93,208 (again, that’s for Ontario). Above that income level, dividends are taxed at higher rates than capital gains, which makes dividends less appealing, relatively speaking, for higher income earners. (See for marginal tax rates on various types of income in different provinces.)

Another consideration is that the actual amount of dividends is “grossed up” by 38 per cent to determine your taxable dividend income (before the dividend tax credit is applied). As such, the gross up could result in a claw-back of income-tested credits and benefits such as Old Age Security.

As you can see, there are a lot of moving parts here. If I had two investments – one that distributes exclusively ROC and one that pays only dividends – and I had to choose which one to leave in my non-registered account, I’d probably pick the one that pays ROC. There would be no tax consequences until the investment is sold, whereas, unless my income is very low, I would have to pay some tax on my dividends every year. For the same reason, an investment that is expected to generate its return exclusively from capital gains would probably be a better choice for a non-registered account than a dividend-paying investment.

--John Heinzl

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