The Manager's Commentary - January 2011

The fund lagged the benchmark returns as the cash balances were generally higher due as the manager opportunistically deploys new fund capital into existing equity holdings.

CN Rail provides us with a good illustration on the effect that consistent increases in dividend payments has upon overall rate of return for a company. In late January, CN Rail reported a 19% jump in fourth quarter operating income and announced that it will boost its dividend by 20%. With this increase, the compound annual dividend growth rate for CN Rail has exceeded 16% since it went public in 1996. Dividend growth is an important attribute in our stock evaluation process, both because rising income helps to drive total return and because dividend increases often signal management’s confidence in their company’s ability to generate and grow cash flow in the future.

Even though CN currently offers a modest yield of 2% and would not be considered an “income” stock per se, dividend growth will likely play an important role in the stock’s future performance. Consider the following example: assume one invested $10,000 in CN Rail today and the company was able to keep raising its dividend at an annual rate of 13% (about one fifth less than its historic clip). Assume further that the price of CN stock never again rises from its current level, so that even 20 years from now, the original $10,000 investment is worth the same amount. As time passes and CN pays out income at an ever increasing rate, the dividends collected would start to pile up, resulting in an accumulated $28,494 after two decades. If one was able to reinvest the dividends received so that these funds also produced future income, the final tally would be even higher at $30,645. Based on this accumulation of capital, the compound annual return earned on CN shares over 20 years would be about 5.8% - again, that’s assuming the share price never budged. If CN keeps boosting its dividend at the rate we’ve assumed, however, and its share price remains locked at today’s level, the dividend yield on the stock after 20 years would exceed 23%. Unless we find ourselves in a 25% interest rate environment, the probability of this occurring is unlikely. More realistically, CN Rail shares will appreciate alongside income growth, pushing total return nicely above the 5.8% earned from dividends alone.

Additionally in January, Enbridge also increased its dividend by 15%, and as we allude to above, we expect to the dividend increases to continue to be a very important component to our total return over time.

Dixon Mitchell Investment Counsel
January 31, 2011