This overlooked investment trust can help you tap in to Canada’s dependable dividends

Canada is often dismissed as dull, but it looks exciting for income seekers. And this investment trust can help adventurous types to build a portfolio of diversified income-producing equities.

Toronto Skyline

Toronto rivals London as a multicultural metropolis

America's northern neighbour is often dismissed as dull, but it looks exciting for income seekers

I have always enjoyed investigating adventurous investment ideas. So, when I say that income-oriented investors seeking to build a diversified portfolio of funds should be searching worldwide for new ideas and sources of dividend income, I'm sure you'd expect me to highlight locations that are suitably exotic. Not Canada.

As in boring Canada. Cold Canada. The colony that got away with all that mineral wealth and spare land. My father spent many prosperous years there in the 1950s, but never showed any great desire to go back "bloody cold" was the only comment I recall him making.

Teeming Toronto

But on my last visit to downtown Toronto I think I can safely say that he wouldn't remotely have recognised it. Toronto is now in the running to overtake London as a city of the world: a teeming metropolis full of people from every corner of the globe.

Teeming Toronto aside, Canada deserves more recognition by investors and not just for the usual reasons, such as its safe banking sector or its rampant housing market. Canada boasts a robustness and reliability that I think is hugely appealing, although thrill seekers will also find plenty to admire: local stock exchanges offer a range of small caps with racy investment themes (notably in the energy and cannabis sectors).

An overlooked Canadian trust

This brings me to a London-listed fund that I think nicely sums up the core appeal of Canada it's dull yet dependable. The Middlefield Canadian Income Trust (LSE: MCT) has been on the London Stock Exchange for over a decade, but its market cap is still only a fraction over £100m.

Clearly its managers have had a hard time getting UK investors excited about its mandate. The trust's cautious focus on dividend payouts and quality business franchises may appeal to some, but for most investors Canada's bigger brother to the south tends to grab all the limelight. The US typifies the attraction of growth stocks, whereas Canadian stocks seem a bit parochial.

But I think Middlefield deserves a second hearing for adventurous types keen to build a portfolio of diversified income-producing equities through funds. In terms of net asset value (NAV) it has fairly consistently beaten its benchmark, the S&P/TSX Composite High Dividend index, although in share-price terms it has lagged recently.

The fund's discount to NAV is now a rather toppy 15%, which strikes me as a bit harsh given its performance. Then again, Middlefield's portfolio isn't piled high with cutting-edge US technology stocks.

Peer under the bonnet

Nevertheless, a contrarian investor poking around in the trust's portfolio may find some cause for concern. The first point is that the fund is actually 25% invested in US equities, but not any old stocks big, well-known, globe-spanning stocks such as JP Morgan Chase, which is its biggest holding. Then there is telecoms giant AT&T, the very definition of boring. Next up the fund also has a fairly chunky investment in real-estate funds and assets. That sparks all those old worries about overpriced Canadian property prices. Furthermore, there is a big allocation to pipeline companies such as Pembina and Gibson. For those of us worried about the long march towards decarbonisation, that raises all sorts of red flags. So you can see why there have been some concerns and why marketing this small fund has been a bit of a slog.

A different perspective

But each of these worries can also be seen as a potential strength. The US assets it is buying are high-quality large caps that are sensibly valued. Those Canadian real-estate assets are also probably a safe, defensive bet, especially in a country experiencing huge waves of immigration that are pushing up property prices.

Canada has plenty of land, but no one seems to want to build on the 99.99% outside the city limits of Toronto, Montreal and Vancouver. Meanwhile, pipeline businesses are in the most cash-focused, non-volatile part of the hydrocarbon complex and might have some long-term value even if we extensively decarbonise (although I have my doubts on this score on a 20- to 30-year timeframe).

A juicy yield

Equity income-oriented investors need some diversification in their dividend payouts and I think Canada fits the bill perfectly. By buying into Middlefield you get an actively managed portfolio of relatively boring, cash-rich businesses churning out a dividend yield around 5%, while the fund is also trading well below its NAV.

Even if we are in the late stage in the equity cycle, Middlefield's collection of defensive assets should provide some downside protection alongside that dividend. And remember that Canada is widely deemed a safe haven in a volatile world. Governments of both the centre left and right are sensible and tend to mind their own business. They abide by the rule of law and refrain from indulging in monomaniacal twitter storms. Canada will be a port in the comi

Recommended

Four investment trusts for income investors to buy now
Investment trusts

Four investment trusts for income investors to buy now

Some high-yielding listed lending funds have come through the crisis with flying colours. David Stevenson picks four of the best.
12 Apr 2021
Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
19 Feb 2021
Where to find deep value in investment trusts
Share tips

Where to find deep value in investment trusts

Professional investors Nick Greenwood and Charlotte Cuthbertson of the Miton Global Opportunities trust pick three of their favourite investment trust…
15 Feb 2021
Why investment trusts are the connoisseur’s choice of fund
Investment trusts

Why investment trusts are the connoisseur’s choice of fund

Investment trusts have justified their reputation as the best type of collective investment in 2020, says Jonathan Davis.
7 Dec 2020

Most Popular

“Joke” cryptocurrency dogecoin goes to the moon. What’s going on?
Bitcoin

“Joke” cryptocurrency dogecoin goes to the moon. What’s going on?

Dogecoin – a cryptocurrency created as a joke – has risen by more than 9,000% this year alone. Saloni Sardana looks at how something that began as an …
19 Apr 2021
The FTSE 100 has clawed back above 7,000 – how much higher can it go?
UK stockmarkets

The FTSE 100 has clawed back above 7,000 – how much higher can it go?

The FTSE 100 index has risen to over 7,000 for the first time in over a year – it now sits just above where it was in 1999. But its era of neglect cou…
19 Apr 2021
The bitcoin bubble will burst: here’s how to play it
Bitcoin

The bitcoin bubble will burst: here’s how to play it

The cryptocurrency’s price has soared far beyond its fundamentals, says Matthew Partridge. Here, he looks at how to short bitcoin.
12 Apr 2021