Editor’s Note: Please see our analysis of the latest news from our Dividend Champions in the Portfolio Update section following the article below.

If Canadian corporate profits are down, it must be because of the energy sector, right? Well, yes and no.

Statistics Canada’s (StatCan) latest financial numbers for Canadian enterprises show that the country’s corporations saw operating profits drop 3.4% year over year, to C$77.4 billion.

Although the energy sector accounted for nearly 60% of the decline, most of the balance came from the financial sector. In particular, insurers recorded a C$1.2 billion drop in operating profits due to fair-value adjustments to actuarial liabilities.

To be sure, energy and financials weren’t the only weak spots during the fourth quarter: StatCan notes that operating profits declined in 13 out of 22 industries.

Overall, operating profits were down about 12.2% from the cycle high in the third quarter of 2014. At the same time, they’re only off by about 2.4% from their trailing five-year average.

So while the recent trend is decidedly not a friend—operating income has declined sequentially in four of the past five quarters—the latest figure is hardly a disaster.

It also should be noted that the fourth quarter wasn’t even the trough—that actually occurred during the first quarter of last year, when operating profits were nearly 7% lower than the latest number.

That period encompassed what some economists have referred to as a technical recession—gross domestic product (GDP) declined during the first half of the year before a sharp rebound in the third quarter. Naturally, that rebound helped give a substantial boost to operating profits.

We could be at a similar juncture. Economists estimate that GDP essentially flatlined during the fourth quarter, with growth expected to come in at around 0.1% (StatCan doesn’t release the official number until next week).

Fortunately, the economy is expected to reaccelerate sharply during the next three quarters. No doubt that the energy sector will continue to be a drag, at least until supply and demand appear to be coming back into balance. But clearly that won’t be enough to offset growth in other areas.

Meanwhile, it’s worth noting which sectors of the economy actually produced meaningful growth during what was a challenging fourth quarter.

On that score, the two sectors that saw the biggest jump in operating profits were motor vehicle and parts manufacturing (up 5.3%) and food and soft drink manufacturers (up 5.7%).

Of course, StatCan’s data reflect a broad swath of Canadian enterprises, of which the publicly traded companies that comprise the country’s stock market are merely a subset.

Nearly 60% of the 239 companies on the benchmark S&P/TSX Composite Index have now reported fourth-quarter earnings. Thus far, sales are down 7.8% year over year, while earnings fell 5.1%.

As might be expected, the resource sector has been the biggest contributor to these declines.

However, there are a couple pockets of noteworthy growth. For the 10 out of 13 firms in the information technology sector that have reported earnings, sales rose 3.0%, while earnings jumped 10.1%.

Of greater note for income investors is the performance of the country’s telecom sector, which includes the Big Three, BCE Inc. (TSX: BCE, NYSE: BCE), Telus Corp. (TSX: T, NYSE: TU) and Rogers Communications Inc. (TSX: RCI/B, NYSE: RCI), our favorite oligopoly. Sales eked out a gain of 0.9%, while earnings climbed 3.6%.

This performance underscores why companies that provide essential services make great investments during uncertain times: Stable demand sustains steady dividends.

Now, it’s time for the rest of the market to catch up.

The Dividend Champions: Portfolio Update

By Deon Vernooy

Choice Properties REIT (TSX: CHP-U, OTC: PPRQF) delivered excellent results for the final quarter of the 2015 financial year, with funds from operations per unit increasing by 7.4%. Key reasons for the solid performance were the increase in rental income and slightly higher occupancy.

The balance sheet remains in good shape, thanks to the company’s investment-grade rating, a debt-to-assets ratio at 45%, and debt service coverage of 3.6 times.

The largest tenant in the portfolio is the well-performing food retailer Loblaw and its subsidiary Shoppers Drug Mart, providing stability to the rental income stream with future growth coming from further developments, property intensification and acquisitions.

This performance flowed through to the monthly distribution, which was increased by 3.1%, for a current yield of 5.5%. It is important to note that the payout ratio is only 81%, leaving room for further increases. The good results prompted us to raise the fair value to C$13/US$10.

Inter Pipeline Ltd. (TSX: IPL, OTC: IPPLF) finally received some love from investors, with the stock price jumping 10% after the company reported excellent results for the final quarter of 2015.

Earnings per share increased by 69% year over year, while adjusted funds from operations (i.e., operating cash flow minus maintenance capital expenditures) climbed 19%. Full-year net income was up 33%, while the dividend was 13% higher than a year ago.

The key to this outstanding performance was the company’s Oil Sands Transportation unit, where profits increased by 59% due to pipeline capacity additions at Polaris and Cold Lake.

A good result also came from the Bulk Liquid Storage division, where a substantially higher capacity utilization boosted profits by 78% in the quarter.

The current financial year should deliver positive profit growth, albeit at a much lower rate. The company is winding down the heavy development program of the past few years.

With a current yield of 6.4%, Inter Pipeline remains one of our favourite pipeline companies and a firm holding in our Dividend Champions Portfolio.

For Finning International Inc. (TSX: FTT, OTC: FINGF), the largest Caterpillar equipment distributor in the world, last year is one best forgotten: The company suffered a loss of C$161 million. The net loss included a large impairment charge on a distribution network and costs associated with facility closures, inventory and asset impairments, and severance costs.

Adjusted for these (hopefully) one-time items, net profit amounted to C$221 million, down 31% year over year, while free cash flow fell 33%. These results are probably a fairer reflection of the company’s underlying business performance than the unadjusted numbers. The full-year dividend was 3% higher than a year ago.

Finning has taken several steps to reduce operating costs in the depressed business environment, including a 13% reduction in its global workforce and a sharp decrease in its real estate footprint.

Despite its dependence on commodity producers, Finning derives significant revenue from product support, which is less cyclical than its other major profit centers. It also maintains a solid balance sheet and generates excellent cash flow–all factors that support the consistent payment of dividends.

The current dividend yield on the stock is 4.1%. The dividend should be safe for the current year, and we will continue to hold the stock in the Dividend Champions Portfolio for its long history of steady dividends, attractive yield, and the upside potential when the commodity cycle recovers.

RioCan REIT (TSX: REI-U, NYSE: RIOCF) reported that fourth-quarter 2015 adjusted funds from operations per unit were 10% higher than a year ago. The full-year dividend remained unchanged for the third consecutive year.

The REIT also reported further progress with the leasing of the space vacated by Target Canada and has now completed or is in advanced negotiations on 32 leases, which will cover more than the lost Target base rent.

RioCan recently sold its entire U.S. property portfolio, which represents 20% of the leasable area of the REIT. Once the transaction settles as expected toward the middle of 2016, it will create a dilutive effect on the profit per unit until it is replaced.

The REIT’s units currently yield 5.7%, which is attractive considering the quality of the portfolio. Hopefully, dividend growth will resume in 2017 as the Target replacement leases start to produce revenues and development projects come to conclusion. We are comfortable holders of RioCan in the Dividend Champions Portfolio.

Royal Bank of Canada (TSX: RY, NYSE: RY) reported a 4.2% decline in quarterly earnings per share, which fell short of analyst estimates. Consequently, traders knocked the share price down sharply and for good measure took the other main Canadian banks down as well.

Profits declined as provisions for credit losses in the Capital Markets division increased courtesy of poorly performing oil and gas borrowers. Profits in this division declined by 4%.

The all-important Personal and Commercial banking division also felt the need to increase credit loss provisions, mainly on Alberta credit card and personal loan books. Overall, this division fared reasonably well, with a 3% increase in net income as higher loans and deposits and fee revenues in the Canadian section of the business made a positive profit contribution.

Wealth Management increased profits by 32%, with the inclusion of the newly acquired City National Bank, or 9% excluding City National. Investor and Treasury Services had a small increase in quarterly profits, while insurance division profits dropped 29% as higher claims dented profits.

While investors were spooked by the higher credit loss provisions, which increased from 24 basis points to 31 basis points of average loans over the course of the past year, it should be noted that loans to oil and gas companies only make up 1.6% of the total loan book.

The dividend was increased by 3%, to C$0.81 per quarter. With a dividend yield of 4.8% and a forward price-to-earnings ratio of 9.8 times, we will continue to hold Royal Bank in the Dividend Champions Portfolio.