Young and Frederick - ScotiaMcLeod Whitby

As a follow-up to our report “Dividends – Getting paid to wait!” published on April 6, 2009, where we highlight the
importance of dividend income as a component of total investment return, we have updated the table of Toronto-listed
companies that have increased dividends in either 2008 or 2009. To reiterate our previous thoughts, given the severity
of the current economic downturn, continued weakness in housing and labour statistics, and the restructuring of the
financial system, it is entirely plausible that the market remains directionless for a long period of time (albeit
with some volatility) once a bottom has been reached. In such a scenario where capital gains will be elusive, income
will be that much more important. Furthermore, given that dividend increases are often a good indicator of
management’s and board of directors’ confidence in the strength of the company’s capital position and operating
outlook, companies that have consistently done so are likely a good place to start when looking for survivors
and leaders once this economic turmoil subsides irrespective of an imminent recovery or following an extended
period of stagnant activity).

Certainly, the economic climate does not appear as dire as it did back in early spring as we have seen a deceleration in the pace of economic decline alongside a drastic reversal in investor sentiment. The recent three-month rally has been led by cyclical and high-beta sectors as concerns over a financial system meltdown have waned and the effects of stimulus packages take hold, particularly in Asian markets. At this stage and at current valuations, here are some of the strategies and views that we would like to share pertaining to the list of companies that have increased dividends in 2008 and/or 2009:

• One of the most attractive sectors included on this list is the telecom space. The sector offers a reliable income stream through dividends (with yields near their highest level in five years); attractive valuation relative to historical standards and U.S. peers; and, a rare combination that offers defensive characteristics and exposure to discretionary and business spending (thereby positioning for an eventual economic recovery). All three Canadian telecom service providers appear on the list we compiled and our order of preference remains Rogers Communications (RCI.B), BCE (BCE), followed by Telus (T). The shares at current prices offer an excellent opportunity for both short-term and long-term investors.

• From a shorter-term perspective, particularly with a lack of potential catalysts on the horizon once Q2 earnings season is behind us, it would not be surprising to see a moderate rebound in the defensive sectors. Especially given their attractive yields on an absolute and relative basis, and drastic underpformance over the past several months, it is possible that some of these names will be sought after over the near-term. Given the recent run in cyclical and financial sectors, it would not be surprising to see some profit-taking and short-term rotation into defensive names with attractive yields. Companies that have increased dividends over the past two years that we believe will benefit from such a short-term rotation include Empire (EMP.A), TransAlta (TA), Enbridge (ENB), and TransCanada (TRP). One note of caution however, is that this is more of a tactical short-term income-oriented trade; downside is protected through yield but longer-term upside may also be elusive as we progress through this economic downturn and investors look to increase their cyclical exposure.

• We recommend reading Scotia Capital’s July 9th publication on Pipelines, Energy Utilities & IPPs. The Utilities & Pipelines analyst Sam Kanes highlights some intriguing short-term opportunities in his coverage universe.