Stock Smarts: Think Outside the Box
There are still good opportunities for income-oriented investors. You just have to think outside the box.
That’s the view of Leslie Lundquist, a senior vice-president of Franklin Templeton Investments and co-lead manager of the Franklin Bissett Canadian High Income Fund and the Franklin Bissett Strategic Income Fund. Both funds focus on finding high-yield stocks.
Ms. Lundquist acknowledges that stocks are not cheap at this point and advises income investors to look beyond the traditional “widows and orphans” stocks in such sectors as banks, utilities and telecoms for above-average returns at reasonable risk.
“People need to consider companies that are not as well known, in sectors they might not normally look at,” she says.
One such sector is energy, which had never been viewed as a prime source of income securities until the advent of income trusts. In fact, many of the most attractive companies today are former trusts.
Ms. Lundquist is based in Calgary so it’s perhaps not surprising that energy stocks make up the largest single component of her two funds, each at about 37% of total assets.
Her second top pick is Artis REIT (TSX: AX.UN), a diversified Canadian real estate investment trust that holds office, industrial and retail properties. Its main focus is on Western Canada but it also owns properties in the U.S.
Artis, which is based in Winnipeg, offers a yield of 7.1%. That’s very high for a REIT but Ms. Lundquist believes that’s because it does not have as proven a track record as the older REITs. “The high-yield market isn’t entirely convinced it will continue on a maturity path,” she says.
Interest rate concerns are also contributing to keeping the share price down and the yield high. Typically, higher rates tend to depress REIT market values but Ms. Lundquist notes that could be at least partially offset by higher rents.
Her number three selection is Chemtrade Logistics Income Fund (TSX: CHE.UN), which she likes for its high yield (currently 5.9%) and its “long history of generating cash flow for investors.” She views the acquisition of General Chemicals last year as a “truly accretive” move that has strengthened the company even more.