Editor’s Note: Please see our analysis of the latest news for RioCan REIT, Crombie REIT, H&R REIT, Suncor Energy, and Canadian Utilities in the Portfolio Update following the article below.

History buffs may recall the folksy aphorism that General Douglas MacArthur used to describe his island-hopping campaign against the Japanese during World War II: “Hit ‘em where they ain’t.”

We’ve found that this saying has broad application to other areas of life as well, including investing.

As value-oriented investors, we try to find stocks before they become household names. But we also like to scoop up big-name stocks that have fallen out of favor with the market, as long as their businesses remain otherwise fundamentally sound.

Both approaches involve going where most investors “ain’t.” And that helps us build positions in good stocks at the right price.

Although it’s impossible to time the market and certainly impossible to time any one stock, patient investors who wait to buy solid companies at reasonable prices will be well rewarded over the long term.

But we’re not just value investors, we’re also income investors. And as income investors, the “hit ‘em where they ain’t” strategy literally pays dividends.

When you buy shares of a dividend stock after it’s fallen in price, you’re getting an opportunity to lock in a higher yield than those who piled into it near the top.

And because most of our subscribers are based in the U.S., there’s a third way in which we benefit from the “hit ‘em where they ain’t” strategy. While U.S. investors couldn’t get enough of Canada during the energy boom, they can’t seem to run away fast enough now that energy prices have collapsed.

Just how bad is it? According to Statistics Canada, foreigners have invested just CAD5.1 billion in Canadian equities on a year-to-date basis through the end of September. By contrast, they invested CAD28.7 billion during the comparable period a year ago.

The good news is that the summer swoon is over. During July and August, foreign investors pulled CAD12.4 billion out of Canadian stocks.

While some of those outflows were related to mergers-and-acquisitions activity involving tendered shares, the year-to-date trend is unmistakable. Could the summer have marked the sort of capitulation we look for as a sign that the market has bottomed?

It’s too soon to tell, though the S&P/TSX Composite Index is off its low from that period. And September saw investor inflows moderately rebound, to CAD3.2 billion.

Meanwhile, the Canadian dollar could face additional selling pressure if the U.S. Federal Reserve finally raises rates at its December meeting.

But a further decline in the currency could provide a nice entry point for investors with a medium- to long-term time horizon.

The Canadian dollar has fallen from parity with the greenback just a few years ago all the way down to USD0.75. And since markets have a penchant for drama, we wouldn’t be surprised to see the exchange rate drop to USD0.70 following a rate hike.

So if you’re a U.S.-based investor looking to deploy new money, buying Canadian stocks is like doubling your coupons at the supermarket.

Of course, it is isn’t always easy buying out-of-favor stocks. Most investors, even the professionals, like the immediate affirmation of a rising share price.

After all, it’s no fun waiting to be proved right about an investment. But in this environment even the very best companies face selling pressure.

One of the ways we try to overcome this innate psychology is by dividing our usual investment into thirds. We know we won’t time our investment perfectly.

But our hope is to get a better average price than we would have with a lump-sum investment. In the meantime, this strategy allows us to keep some of our powder dry, which helps us sleep at night when dealing with a difficult market.

The Dividend Champions: Portfolio Update

By Deon Vernooy

RioCan REIT (TSX: REI-U, OTC: RIOCF) announced that it has reached a $132 million settlement with Target Corp., the U.S. parent of the now-defunct Target Canada. The settlement relates to 18 disclaimed leases that were guaranteed by Target Corp.

The REIT also announced that it has re-leased or is in advanced negotiations for re-lease of 1.2 million square feet of vacated space (about 56% of the vacated space), which is expected to provide an annual base rental income of $10.9 million to RioCan. Interestingly, the base rent on this space will almost double the rent paid by Target.

RioCan indicates that the new leases will commence in mid-2016 and that the redevelopment cost will be around $110 million. This is altogether a positive development for RioCan, which remains on our Dividend Champions Watch List.

Two of the REITs currently held in our Dividend Champions Portfolio also carry vacancies created by the closing of Target Canada. Hopefully, these REITs will also soon be able to announce settlements with Target Corp.

Crombie REIT (TSX: CRR-U, OTC: CROMF) had three leases disclaimed by Target Canada, of which one was guaranteed by Target Corp. The 329,000 square feet vacated by Target Canada represented around 2% of gross leasable area. Crombie is pursuing the re-lease of the space.

H&R REIT (TSX: HR-U, OTC: HRUFF) had nine locations occupied by Target Canada, of which eight were disclaimed, with one lease already taken over by Canadian Tire. Three leases were guaranteed by Target Corp.

H&R recently indicated that the re-leasing of these eight locations is progressing well, and announcements regarding almost 75% of the space are expected early in 2016, with occupancy to occur by late 2016 or early 2017.

In other news, the Alberta Climate Leadership Panel’s report as well as the Alberta government’s announcement regarding the main pillars of its Climate Leadership Plan were both released on Nov. 22.

While the government’s plan lacked some details, most industry participants seemed to welcome the balanced outcome and the certainty provided. Some of the proposed changes were the following:

• Carbon dioxide emissions will be capped at 100 megatonnes per year for oil sand producers. These operations currently emit 70 megatonnes per year.
• A carbon tax of $20 per tonne in 2017 and $30 per tonne in 2018 will be applied where emissions are measured relative to the most efficient producers.
• The Alberta Environment and Parks agency estimates that this will cost oil sands producers on average between $0.50 and $0.75 per barrel of oil. The efficient producers will obviously pay less.
• Consumers will pay a $0.07 per liter carbon tax levied on fuel consumption and $1.68 per gigajoule for natural gas.
• Coal-fired power generation facilities will be phased out by 2030.
• Renewable energy and natural gas will replace coal in power generation.
• Starting in 2018, coal-fired generators will pay $30 per ton for all carbon-dioxide emissions per unit of electricity produced over the cleanest gas-fired plant.

The oil exploration and production companies mostly welcomed the announcements, as the cap on carbon emissions will not be reached for some time (between 2020 and 2030), while improving technology will probably extend the runway further.

Dividend Champions holding Suncor Energy (TSX: SU, NYSE: SU) should benefit from increased certainty provided by the announcements.

The operators of Alberta-based coal-fired power stations (such as Transalta) will have to revisit their power-generation strategies and will also face increased costs from 2017 onward for carbon emissions.

Dividend Champions holding Canadian Utilities (TSX: TU, OTC: CDUAF) operates three coal-fired power plants in Alberta, with a combined capacity of 689 megawatts (18% of total generation capacity, while power generation contributes less than 20% of profits). The announcements should have a relatively minor impact on the company.