Diversify your income with high yield from Canada

Middlefield Canadian Income aims to provide shareholders with a high level of dividends as well as capital growth over the longer term. While the discount on MCT has since reduced from 4 per cent to 1.74 per cent (9 May 2014), there are still plenty of reasons to invest, particularly for investors who are seeking an alternative source of income.

Canadian equity income securities offer attractive yields and also the potential for capital growth. The yield on the fund's benchmark index, the S&P/TSX Equity Income, is 4.8 per cent, significantly higher than 3.3 per cent from the FTSE All-Share and 2.2 per cent from the S&P Composite. MCT also beat its benchmark by big margins on a share price total return basis over five and three years to 31 March 2014.

The current yield on this trust is 4.64 per cent on a share price of 107.75p (9 May 2014). Dividends are paid quarterly.

Eighty-five per cent of the trust is in equities with the rest in cash or cash equivalents. It has more than 60 holdings.

The trust's currency exposure is unhedged meaning investors face the potential risk of loss from fluctuating foreign exchange rates. The fund managers report that the Canadian dollar has weakened against sterling over the 12 months to the end of March.

Stockbroker Killik & Co rates Middlefield Canadian Income as "attractive on a discount basis" and Canaccord Genuity have also issued a 'buy' note on this trust.

Alan Brierley, director of the investment companies team at Canaccord Genuity, says: "The manager has constructed an impressive long-term performance record with significant outperformance of benchmark. The focus is on companies that can deliver attractive and sustainable dividends and the current yield is 4.7 per cent. In the past couple of years, the asset class has lagged the liquidity-driven US market, while weakness in the Canadian dollar has negatively impacted returns for sterling investors.

"However, in recent weeks, those momentum stocks that have performed so well have materially underperformed, while a sustained economic recovery remains elusive. We believe that Middlefield is well placed for any rotation from growth to value, while it has an important role to play in diversifying dividend income streams."

He also points out that Canadian equities have materially lagged the UK, meaning significant valuation discounts have emerged. The S&P/TSX Equity Income index trades on a 23 per cent and 45 per cent discount in terms of price/cash flow and EV/EBITDA, respectively.

"Our North American strategists believe that the recent rout in US momentum stocks does not mean the end of the cyclical bull market, but a long overdue rotation from high multiple stocks to ones with lower valuations," says Mr Brierley. "They believe that the S&P/TSX index is well positioned for this transition with financials, utilities, energy and materials historically performing well through value cycles."

We first tipped the fund at 106.89p (IC, 28 September 2012). If you are looking to diversify your income sources overseas, this fund remains a good option. Buy.

Source: Middlefield and Investors Chronicle as at 9 May 2014

Source: Morningstar

TOP TEN HOLDINGS (as at 31 March 2014)

Sector allocation (as at 31 Marcy 2014)