Canada’s Dial Tone

TheStreet.com, Summer, 2012. This article was written with Oliver Pursche, the Co-Portfolio Manager of the GMG Defensive Beta Fund. It was part of a series of articles developed under an agreement with thestreet.com to work with a variety of contributors and assist them in delivering actionable investment ideas each week.

NEW YORK (TheStreet) — Readers familiar with my work know that a large chunk of my investment strategy is focused on dividends. As such, in the telecom world we own AT&T (T), Verizon (VZ) and CenturyLink (CTL).

Noting that T and VZ have risen approximately 30% and 16%, respectively, in the past year, they may be a bit overvalued. Today, they are great “hold” stocks, in my opinion, but new money in those companies may not be your best bet at this time.

Accordingly, I wanted to point out some Canadian telecom stocks with solid dividends and growth prospects: BCE (BCE) and Bell Alliant, which trades on the Toronto stock exchange as BA.

BCE used to stand for Bell Canada Enterprises, but through a series of corporate machinations it is now simply called BCE.

BCE offers a 4.7% yield, is one of the largest phone companies in Canada, and has a strong balance sheet. The dividend’s growth rate is at an astounding 11.03% (note that VZ’s dividend CAGR is 4.66% and T’s dividend CAGR is 4.32%).

Similarly, Bell Alliant is sporting a monster yield of 7.3% (a component of this is actually a return of investor principal that may be subject to special tax treatment; consult with your tax adviser or CPA prior to investing), with a dividend CAGR of 15.11% over the last five years.

Keep in mind, the figures above are in Canadian dollars, and currency fluctuation brings some added risk or, depending on your appetite for excitement, opportunity. If you want to avoid the excitement, you can simply purchase American Depository Receipts of BCE on the New York Stock Exchange. For Bell Alliant there are no ADRs.

The risk is that the U.S. greenbackr appreciates against the Canadian dollar, and that when you convert your Canadian investment into U.S. dollars you will go backwards by an amount related to the dollar appreciation. However, the reverse is also true. If the Canadian dollar appreciates against the U.S dollar then when you convert you will get more U.S. dollars, and a bump on your overall return.

I anticipate the Canadian dollar will continue to strengthen against the U.S. over the next year to year and a half. Our policies are getting more inflationary, and Canada’s are not. If you have the intestinal fortitude to play this game, you could be handsomely rewarded.