Middlefield Canadian Income: A six percent yield and a double-digit discount

Income investors looking for a sustainable yield might want to consider diversifying into Canada where far fewer companies have cut their dividends than in the UK. 

The £103m Middlefield Canadian Income Investment Trust (LON:MCT) aims to provide a high level of dividends and capital growth by investing mainly in Canada and the US. About a third of the fund is currently allocated to the latter with the rest committed to its Northern neighbour. 

Nowhere has been immune from the pandemic, but while almost three quarters of UK FTSE 350 dividends have been cut, only a fifth of Canadian TSX-quoted capital has been similarly affected, while for the S&P 500 it is just 15%. Interestingly both the UK and Canadian indices yield around 3.2%, although the figure is about half that in the States. 

Lead manager Dean Orrico has recently said that he expects Joe Biden to win the presidency in November’s election. This could result in higher corporate and personal tax rates, which would be negative for markets, although the impact would be offset by more fiscal stimulus that would be likely whatever the outcome. There would also probably be better national co-ordination of Covid-19 responses under a Biden administration. 

Income-oriented portfolio 

At the end of September the fund had 21% of its assets invested in real estate, 20% in utilities, 18% in financials and ten percent in healthcare. Fortunately it had moved its property exposure away from vulnerable areas like office and retail before the pandemic. 

More than half of the allocation to utilities is in renewables and these have done relatively well this year. Orrico believes that Canada is in a decent position to benefit from the response to climate change threats with around a fifth of the country’s energy needs coming from renewable sources. 

MCT’s financial holdings may be more of an issue because of the ultra-low interest rates putting pressure on margins, but the banks have stronger capital reserves now than they did during the global financial crisis because of the tougher regulatory requirements. 

Strong long-term record with stable dividends 

Year-to-date the NAV is down around 14%, with the share price falling 19% and the discount opening up to 17% from 11% at the start of 2020. The longer term performance has been pretty good given that dividend paying stocks have been out-of-favour, with the NAV up 117% since inception in July 2006, which is well ahead of its composite high yield benchmark. 

Despite the reduction in NAV, the income has held up well with only one portfolio holding shelving its dividend and that has now been sold. MCT is currently yielding 6.3% with equal quarterly distributions in January, April, July and October. The total annual dividend of 5.1 pence per share has been maintained since July 2017. 

MCT offers an interesting option for income investors who want to diversify part of their dividend stream overseas. It should do well when the economic outlook improves, especially if the discovery of a vaccine prompts a rotation back into out-of-favour areas like dividend paying stocks.