Are These The 'Safest' Companies For The Canadian Wide Moat 7?

|
Includes: ANCUF, BAM, BCE, BNS, CDUAF, CNI, CP, ENB, FTS, RY, TD, TRP, TU
by: Dale Roberts
Summary

Yup, the Canadian Wide Moat 7 Dividend Growth Portfolio is about to become a yawnfest, if things go well.

It's time to add some more pure utilities to the mix and the dividend growth darlings of Canada.

Please welcome the two companies with the greatest Canadian dividend growth streak - Fortis and Canadian Utilities.

These companies might be boring, but they might also bring in some added stability, income and income growth to the portfolio.

My readers have been yelling at me to get some of the more pure utilities into the Canadian Wide Moat 7 Portfolio. OK, many of the readers are Canadian, so they've been writing me kind notes and suggestions, but you get the idea.

And if you're a US investor, don't run away so fast, the Canadian Wide Moat 7 portfolio offers companies (so far) that are all "investable" for you. We see many Seeking Alpha US investors taking advantage of these Canadian dividend payers, taking advantage of that unique oligopoly situation that exists in Canada in many sectors and for many companies.

For my personal retirement portfolio, I only hold 7 Canadian dividend payers that appear to have a simple wide moat. Canada is unique in that certain companies in certain sectors have worked their way to an oligopoly situation - protected from competition. They are protected by regulations, the Canadian preference and incredible barriers to entry. While this still does not guarantee business success, I feel and hope that it will allow for continued business health, making for continued generous and growing dividends.

The Wide Moat 7 represents just 3 sectors. That said, it "covers" one of the most influential sectors in Canada, the financials, plus the consumer by way of the telcos and energy by way of pipeline/energy names.

Those 7 companies are Canada's 3 largest banks - Royal Bank of Canada (RY), TD Bank (TD), Scotiabank (BNS). Two of the biggest telcos in Bell (BCE) and Telus (TU), and the two biggest pipeline and energy players in Enbridge (ENB) and TransCanada (TRP).

I had expanded the portfolio to 8 with the addition of Alimentation Couche-Tard (OTCPK:ANCUF), a North American and international fuel retailer growth behemoth.

And in more traditional wide moat fashion, the Canadian Railways CNI and CP made it 9 and 10 (Here's Now Arriving The Canadian Wide Moat 10 Portfolio, All Aboard).

Taking the portfolio to 11 was the incredibly successful Canadian gem Brookfield Partners (BAM). It operates with four successful business models. Here's The Canadian Wide Moat 7 Dividend Growth Portfolio - BAM It's Now 11.

The Goal and Objective of The Canadian Wide Moat Portfolio

Two words - Don't Lose.

I seek wide moat/business moat dividend safety.

Of course, I've taken on some incredible concentration risk trusting the bulk of my retirement portfolio to 7 companies. That's a risk I am "comfortable with". But given the concentration risk, I wanted to explore how I (and with the help of readers) would expand the list to 15 companies and then 20 companies. Many will still write that 20 companies is not enough, but there is ample evidence that 20 companies in the large cap dividend space can "be enough".

I recently wrote on the more concentrated Vanguard Canadian High Yield Index Fund that has beat the market over the last six years. The bulk of the assets and risks and returns are held in the top 10 companies.

There is also the MSCI High Dividend Yield Indices that have beat the market in Canada, US and International.

Utilities can offer generous income and regulated contract income

That rings of wide moat. And once again, the two Canadian utility companies are Fortis (FTS) and Canadian Utilities (OTCPK:CDUAF). These two companies offer two of the biggest, continuous dividend growth streaks in Canada.

Here is the Canadian Dividend All-Star list link.

And well, these two companies are not just near the top, but they are the top of the list, and top of the dividend growth heap. Here's the list of Canadian companies with at least a dividend growth streak of 15 years or more. This article by Seeking Alpha writer John Lawlor, Fortis, Inc.: Boring Can Be Beautiful, nails the theme. Boring can work. In fact, maybe that's how the goal of the Dividend Growth Wide Moat Portfolio should be described - Boring. Or as a kid will mock you when they've got "nothing to do" - BOORRRRRIIINNNNNGGGG!

From John's article summary. Heck, it even sounds good in Latin. And we usually put those moats around Forts? Yes, this more than "sounds good".

And from a Motley Fool article that recommended Fortis and a Brookfield offering as top of the heap for Canadian "safety".

Fortis is as strong and diversified as it has ever been. In 2016, the utility acquired ITC Holdings, a regulated, independent electric transmission company in the U.S., which enjoys double-digit growth and complements Fortis's regulated electric and gas assets in the U.S., Canada, and the Caribbean. Fortis is now one of the top 15 North American utilities and generates 64% of its earnings from the U.S.

And it's a habitual market beater as well. It's more than the income and income growth.

I was more than surprised to see this boring utility beat the market in Canada.

And right on cue, we see that Canadian Utilities is also a perpetual market beater. On the Toronto Stock Exchange, here's CU vs. the TSX 60, iShares XIU - the longest running ETF in Canada.

What I also like about this utility tag team is the lesser drawdown and more attractive "worst year" stats. Here are Canadian Utilities and Fortis in an equal weight portfolio from 2001. A worst year of -11%. A max drawdown of 26% in the Great Recession. Sign me up. OK, I guess I can sign myself up.

In this article from Ploutos Investing, we see the Dividend Growth History for Canadian Utilities in Canadian Dollars.

Ploutos Investing likes the dividend coverage and modest growth prospects.

Surprise. Surprise.

Again, my biggest surprise when looking at the two Dividend Kings in Canada is that there was also generous total returns. One might be satisfied with the modest dividends and dividend growth, but that total return potential can bring an obvious benefit for the investor in the accumulation stage and in the decumulation stage. The retiree might execute a nice combination of cash dividends combined with modest homemade dividends by way of share harvesting.

A market beat with a much lesser than market drawdown. That's a combination that sounds attractive to this "near retiree" who has recently entered a new work life stage and venture.

Of course, do your own research and know your comfort level for concentration risks. US investors should also look into Canadian withholding taxes (and mostly how to avoid them and recover 'em).

Author's note: Thanks for reading. Please always know and invest within your risk tolerance level. Always know all tax implications and consequences. If you liked this article, please hit that "Like" button.

Disclosure: I am/we are long BNS, TD, RY, AAPL, NKE, BCE, TU, ENB, TRP, CVS, WBA, MSFT, MMM, CL, JNJ, QCOM, MDT, BRK.B, ABT, PEP, TXN, BLK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.