RBC Dominion Securities Inc. Equity Income Guided Portfolio

June 1, 2016 | Quarterly Report Portfolio Advisory Group – Equities

What’s inside 3 Portfolio positions In search of green shoots

4 Sector commentary U.S. economy still providing a safer haven, but a shift could be underway. 8 Magna International Inc. Portfolio addition Rising interest rates are among the to focus on names that will likely hike biggest macroeconomic risks associated dividends over the medium term and/ 9 DH Corporation with owning a dividend-oriented or are more-positively leveraged to an Portfolio reduction portfolio, as higher bond yields generally economic recovery. have a negative impact on valuations. 10 Portfolio companies RBC Capital Markets Economics 17 Portfolio companies risks An improving U.S. economic outlook continues to believe that the U.S. combined with a gradual tightening economy is poised for a stronger 19 Methodology of Federal Reserve policy may push economic recovery than is the Canadian bond yields higher in the coming economy for 2016. On a year-to-date months. Therefore, RBC Capital Markets basis, the Canadian dollar is trading continues to forecast bond yields will in line with the RBC Capital Markets increase over the coming year, albeit Economics forecast of $0.75. RBC at a much-lower rate, with a target for Economics expects the loonie will get a the Government of Canada 10-year small lift in 2017 on the back of higher oil benchmark bond yield of 2% at the end prices and increased economic activity of 2016, about 65 basis points higher from government stimulus. Because than current levels. the recovery in the Canadian dollar is still potentially quarters away, we are To meet the Portfolio’s objective of maintaining the Portfolio’s exposure to providing a dividend yield that is the U.S. by focusing on companies with approximately 150% that of the S&P/TSX international operations or with a portion Composite Index, while minimizing the of sales denominated in U.S. dollars. risk of higher interest rates, we continue

Canadian dollar forecast (US$/CA$) 1.10 Parity Forecast 1.00

0.90 For an overview of the Portfolio, please click here. 0.80 Click here for authors’ contact 0.70 End of period information. 2013 2014 2015 2016f 2017f US$/C$ 0.94 0.86 0.72 0.75 0.80 For important disclosures, see page 20. 0.60 All values in U.S. dollars and priced as 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 of May 31, 2016, market close unless otherwise noted. Source - Bank of Canada, RBC Economics Research forecasts NOT FOR DISTRIBUTION IN THE U.S. 2 | Equity Income Guided Portfolio

In search of green shoots The Canadian economy has become more reliant on oil and oil investment over the past 15 years, and the adjustment process to a marked downshift in oil-related We believe the pace of investment has not been without bumps. The Energy sector is not only one of the dividend growth in Canada largest components of the S&P/TSX Index, but also has been traditionally one of will continue to slow in the higher-yielding sectors in the index. As such, most income-orientated strategies 2016, but a recovery could allocate a significant percentage of their mandates to that sector, despite the volatile be underway for 2017. nature of the underlying commodities. The sharp drop in oil prices that has occurred over the past 21 months has already forced most oil & gas producers to cut their dividends. At this point we believe the majority of the dividend cuts are behind us. However, the lower dividends yields now have forced income-oriented investors to shift focus to other sectors.

Lower commodity prices are acting as headwinds to Canadian economic growth, and job losses in the oil patch will likely result in lower revenues and cash flows for most Canadian-centric companies. As such, we believe the pace of dividend growth in Canada will continue to slow in 2016.

The dividend growth rate of the S&P/TSX Index has been on a downward trajectory for the past four years and is forecasted to fall into negative territory in 2016 for the first time since the Great Recession.

Going forward we are encouraged by the expected upswings in dividend growth forecasted for 2017. We will continue to search for companies that have the capability of returning capital to shareholders, either in the form of dividend increases or share buybacks for the Portfolio.

Performance S&P/TSX Index year-over-year change in dividends

12.4% 11.3% 9.6% 8.0% 3.3% 5.1% 5.4% 1.0% 3.2%

-2.3%

-14.2% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E

Source - RBC Dominion Securities, Bloomberg

The Equity Income Guided Portfolio generated a total return of 8.75%, 299 basis points behind the S&P/TSX High Dividend Index, which returned 11.74% for the quarter, and behind the broader index return of 10.24%. The Portfolio’s underperformance was due to the underweight position in Energy and Materials sectors, which were the top performers on the index during the last quarter.

Return for the spring quarter (3/1/16 – 5/31/16) Equity Income Guided Portfolio 8.75% S&P/TSX Composite Index 10.24% S&P/TSX High Dividend Index 11.74%

Source - FactSet

June 1, 2016 | RBC Wealth Management 3 | Equity Income Guided Portfolio

Forecast Forecast Price to Forecasted growth in dividend Market Price 52-wk EPS / AFFO / CFPS Earnings/AFFO/CFPS Div Payout Ratio EPS/AFFO growth rate Company name Weight cap (B) 5/31/16 range ($) 2015A 2016E 2017E 2015A 2016E 2017E yield 2015A 2016E 2017E or CFPS to 2017

Interest sensitive

BMO 5.0% $53 $82.30 85 - 64 7.00 7.60 7.70 11.8x 10.8x 10.7x 4.2% 46% 45% 46% 1% 3%

BNS Bank of Nova Scotia 2.5% $77 $64.14 67 - 51 5.67 5.87 6.27 11.3x 10.9x 10.2x 4.5% 48% 49% 48% 7% 6%

NA National Bank 5.0% $15 $43.52 50 - 35 4.70 4.09 5.00 9.3x 10.6x 8.7x 5.0% 43% 53% 46% 22% 7%

RY 5.0% $117 $78.83 81 - 65 4.1%

TD TD Bank 5.0% $106 $57.11 58 - 48 4.61 4.76 5.10 12.4x 12.0x 11.2x 3.9% 43% 45% 46% 7% 8%

CIX CI Financial 2.5% $8 $28.70 35 - 26 2.02 1.94 2.15 14.2x 14.8x 13.3x 4.8% 64% 70% 68% 11% 7%

BAM'A Brookfield Asset Mgmt****^ 2.5% $45 $46.02 47 - 38 1.59 1.94 2.07 28.9x 23.7x 22.2x 1.5% 30% 27% 25% 7% 8%

MFC 5.0% $39 $19.52 24 - 15 1.68 1.80 2.10 11.6x 10.8x 3.8% 40% 41% 40% 17% 0%

IFC Intact Financial 5.0% $12 $91.70 97 - 77 6.38 5.45 6.79 14.4x 16.8x 13.5x 2.5% 33% 43% 35% 25% 3%

HR.UN H&R REIT * 2.5% $6 $21.22 23 - 18 1.48 1.56 1.62 14.3x 13.6x 13.1x 6.4% 91% 87% 83% 4% 0%

SRU.UN REIT * 2.5% $4 $34.50 35 - 27 1.99 2.08 2.19 17.3x 16.6x 15.8x 4.8% 81% 80% 78% 5% 4%

BCE BCE^^ 5.0% $52 $60.45 61 - 52 3.36 R R 18.0x R R 4.5% 77% R R R R

FTS Fortis 5.0% $12 $41.02 42 - 34 2.11 2.16 2.39 19.4x 19.0x 17.2x 3.7% 66% 69% 67% 11% 6%

H Hydro One 2.5% $15 $24.44 25 - 21 1.12 1.17 1.26 21.8x 20.9x 19.4x 3.4% 0% 72% 70% 8% 5%

Consumer

SJR'B 5.0% $12 $25.08 28 - 23 1.85 1.45 1.72 13.6x 17.3x 14.6x 4.7% 63% 83% 70% 19% 1%

TRI ^ 5.0% $41 $55.07 56 - 47 1.39 1.31 1.75 39.6x 42.0x 31.5x 3.2% 124% 138% 98% 34% -3%

CGX Cineplex 2.5% $3 $51.57 52 - 42 1.68 1.79 2.14 30.7x 28.8x 24.1x 3.1% 92% 90% 79% 20% 4%

Industrial

CNR Canadian Nat. Railway 5.0% $61 $77.75 84 - 67 4.45 4.58 5.14 17.5x 17.0x 15.1x 1.9% 28% 33% 33% 12% 15%

DH DH Corporation 2.5% $4 $34.31 44 - 29 2.55 2.15 2.73 13.5x 16.0x 12.6x 3.7% 50% 60% 47% 27% 0%

MG Magna International ^ 2.5% $21 $53.25 75 - 42 4.49 5.17 5.80 11.9x 10.3x 9.2x 2.4% 25% 26% 24% 12% 6%

TIH Toromont Industries 2.5% $3 $36.83 39 - 27 1.86 1.99 2.23 19.8x 18.5x 16.5x 2.0% 37% 36% 32% 12% 0%

Resources

ARX ARC Resources**** 2.5% $8 $21.57 23 - 14 2.27 1.85 2.00 9.5x 11.7x 10.8x 2.8% 53% 35% 30% 8% 0%

SU **** 2.5% $57 $36.22 40 - 27 4.71 2.42 5.41 7.7x 15.0x 6.7x 3.2% 24% 48% 21% 124% 0%

ENB * 2.5% $49 $52.28 61 - 40 3.72 3.99 4.29 14.1x 13.1x 12.2x 4.1% 50% 53% 54% 8% 10%

TRP TransCanada 2.5% $38 $54.34 55 - 41 2.48 2.62 2.83 21.9x 20.7x 19.2x 4.2% 84% 86% 86% 8% 8%

ALA AltaGas^^* 2.5% $4 $30.31 41 - 27 2.84 R R 10.7x R R 6.5% 70% R R R R

IPL Fund * 2.5% $9 $26.65 31 - 18 1.88 1.91 2.06 14.2x 14.0x 12.9x 5.9% 78% 82% 80% 8% 6%

AGU Agrium ^ 5.0% $16 $118.35 140 - 105 7.25 5.83 6.68 16.3x 20.3x 17.7x 3.8% 47% 60% 52% 15% 0% Weighted average dividend yield 3.85%

Source - RBC Capital Markets, Bloomberg ^ The EPS and dividend are in U.S. dollars. ^^ This security is restricted pursuant to RBC Capital Markets policy and, as a result, its continued inclusion in the Equity Income Guided Portfolio has not been reviewed or confirmed as of the date hereof. * Adjusted funds from operations (AFFO) instead of earnings per share (EPS) **** Cash flow per share (CFPS) Payout ratios based on earnings per share, except for the above. Dividend growth rate is based on RBC Capital Markets’ 2016 forecast dividend compared to the current annualized dividend. Growth in EPS/AFFO/CFPS are based on the RBC Capital Markets’ 2016 forecast compared to current. In all jurisdictions where RBC Capital Markets conducts business, we do not offer investment advice on Royal Bank of Canada. Certain regulations prohibit member firms from soliciting orders and offering investment advice or opinions on their own stock. References to Royal Bank are for informational purposes only and not intended as a direct or implied recommendation for investing in Royal Bank and all related securities.

June 1, 2016 | RBC Wealth Management 4 | Equity Income Guided Portfolio Sector commentary

Banks and Insurance Valuations appear fair but may not reflect uncertainties Canadian bank valuations are trading close to historical average levels despite uncertainty about near-term earnings power and longer-term returns as the global capital regulatory regime evolves. We believe near-term returns may be hampered We believe near-term returns by credit quality deterioration as evidenced by rising mortgage delinquency rates, may be hampered by credit increased bankruptcy filings, and credit rating downgrades in the North American quality deterioration. Energy sector. RBC Capital Markets expects a sequential increase in loan losses for the Energy sector loan book. Some of the Canadian banks have taken general loan loss provisions against their loan book during the quarter but expect loan losses to return to normal levels going forward. The recent run-up in crude oil prices may provide some relief and help loan performance going forward.

While a material slowdown in lending could also negatively affect earnings growth, we still believe Canadian banks offer stable-to-growing dividends with relatively low dividend payout ratios (dividends as a percentage of earnings). However, we expect the pace of dividend growth will slow in 2016.

We are maintaining 5% positions in Royal Bank of Canada (RY), TD Bank (TD), National Bank (NA), and Bank of Montreal (BMO) and the 2.5% Bank of Nova Scotia (BNS) position.

RBC Capital Markets continues to believe that life insurance stocks have the potential to generate superior earnings growth relative to banks due to higher exposure to the U.S. dollar and lower exposure to the Energy sector.

A significant decline in long-term interest rates would be the biggest risk to this view as life insurance stocks tend to benefit from rising rates, which is counter to most other dividend-paying stocks.

We still like Manulife Financial (MFC), 5%, because of its strong fundamentals, dividend growth potential, and the ballast it provides the Portfolio should bond yields rise.

Intact Financial (IFC), 5%, is Canada’s largest property & casualty insurer. While not a high yielder, IFC has a strong track record of growing earnings and book value over time, which we believe will translate into sustainable dividend growth. RBC Capital Markets increased its catastrophe loss estimate for impact by 55% to account for any additional losses arising from the wild fires near Fort McMurray. RBC Capital Markets does not expect any negative impact to IFC’s dividend.

CI Financial (CIX), 2.5%, provides exposure to a high-quality asset manager that has consistently delivered strong EPS and dividend growth. However, over the near term, RBC Capital Markets believes that the asset management sector could be negatively impacted by regulatory uncertainty, potentially higher fee pressure, and challenging macro conditions.

Brookfield Asset Management (BAM’A), 2.5%, provides exposure to a global alternative asset manager that derives approximately 80% of its revenues outside Canada.

June 1, 2016 | RBC Wealth Management 5 | Equity Income Guided Portfolio

REITs Real estate to be 11th GICS sector Effective September 1, 2016, with the addition of real estate, the Global Industry Classification Standard (GICS) will increase to 11 from 10. Elevating real estate to a headline sector should help to raise the profile of REITs and focus investor attention Elevating real estate to a on them over time, in large part because GICS sector weightings are an important headline sector should help factor for all kinds of fund products and investment strategies. However, at a high to raise the profile of REITs level, we do not expect Canadian REITs to significantly rise in value on the effective and focus investor attention change date because of the long lead time and other factors. Based on current on them over time. market capitalization, the Canadian real estate sector would be the seventh-largest sector on the S&P/TSX Composite. On a dividend-yield basis, real estate would be amongst the top three, surpassed only by Utilities and Telecom.

S&P/TSX Index dividend yield by sector

4.6% 4.3% 4.2% 4.0% 3.7% 2.2% 1.9% 1.7% 1.2% 0.9% 0.8% Energy Utilities Discr. Materials Financials Consumer Services Staples Telecom. Real Estate Industrials Technology Information Consumer Health Care Health Source - RBC Dominion Securities, Bloomberg

On a total-return basis, the REIT sector has been one of the top performers in Canada in 2016. The recent run-up in unit prices, led by the residential real estate sector, has closed the valuation gap to 3% discount to net asset value, from 13% discount.

While rising rates would be negative for the sector, the wider-than-normal adjusted funds from operations yield spread of 640 basis points should provide a valuation cushion in a scenario where bond yields would marginally increase. We continue to believe that slightly lower valuations reflect the weaker economic growth prospects for Canada and that certain property sectors, notably office and retail, are facing more-challenging supply/demand dynamics.

We continue to hold 2.5% positions in H&R REIT (HR.un) and SmartREIT (SRU.un).

Oil & Gas Fewer options for dividend-oriented investors Supply disruptions from Libya, Nigeria, and Canada have sparked a 40% rally in crude oil prices over the past three months. Despite the recent price surge to approximately US$50 per barrel (/bbl), RBC Capital Markets has maintained its 2016 and 2017 average oil price forecasts of US$40/bbl and US$57/bbl, respectively.

Despite the recent recovery in oil prices, we have chosen to remain underweight oil & gas producers given their relatively low dividend yield and lower probability of dividend increases over the near term. We believe oil & gas producers will use any excess cash flow to reduce their financial leverage as opposed to returning capital to shareholders. We will re-evaluate our position over the upcoming quarter based on spot prices and balance sheet strength.

June 1, 2016 | RBC Wealth Management 6 | Equity Income Guided Portfolio

The few remaining oil & gas producers that continue to pay a dividend offer a dividend yield that is generally inferior to the dividend yield offered by the S&P/ TSX Index. As such, we believe income-oriented investors, who need stable income but want to benefit from rising crude oil prices, may be better served by investing in companies having a significant portion of their business in Alberta, as opposed to purchasing oil & gas producers.

Because of its strong growth profile, we are keeping theARC Resources (ARX) 2.5% position. We are maintaining the 2.5% position in Suncor Energy (SU) as its refining operations provide a partial hedge to lower oil prices, and we expect the company will be cash flow positive in 2017.

We expect new projects, rising prices, and lower capital expenditures for Agrium (AGU), 5% holding, will result in higher cash flow per share and the potential for substantial dividend growth.

Utilities, Pipelines, and Midstreams Investors in the Utilities Staying defensive sector would be best served The sector’s forward price-to-earnings (P/E) ratio remains near its all-time high. focusing on companies that However, relative to the S&P/TSX Composite Index multiple, it has come down and have the capacity to increase is at the low point of the historical range of the past 10 years. dividends. Near the low point of the historical range Forward P/E: Energy Infrastructure divided by S&P/TSX Composite

10-Year GOC Bond Yield 10 - 180% 5% yr GOC Bond Yield 160% 4% 140% 3% 120%

Relative P/E Relative 100% 2% 80% 1% 2005 2007 2009 2011 2013 2015

Source - RBC Capital Markets Quantitative Research

We are cognizant that a material increase in interest rates could pressure valuations. As a result, we believe investors in this sector would be best served focusing on companies that have the capacity to increase dividends.

Additional potential sector-specific risks include lower natural gas prices, lower crude oil prices, or potential royalty rate changes given the recent government change in Alberta. We believe the risk of project delays in the oil sands is partially reflected in the current share prices of some of the midstream companies.

We still like TransCanada (TRP), 2.5%, because of its near-term growth potential, which could result in attractive dividend increases.

There is no change to our 2.5% position in Inter Pipeline (IPL). While RBC Capital Markets expect the company to provide investors with dividend increases over the next two years, we are cognizant that a continued low crude oil price environment could curtail dividend hikes. In the meantime, we believe its dividend is safe over the medium term.

There are no changes in the Utilities sector. Hydro One (H), 2.5%, still has an attractive dividend and low operating risk profile, while we believeFortis (FTS), 5%,

June 1, 2016 | RBC Wealth Management 7 | Equity Income Guided Portfolio

has an attractive dividend yield and ability to generate strong dividend growth over the medium term.

Consumer Challenging search Income-oriented investors are finding few options in the sector as most companies have below-average dividend yields.

We like Thomson Reuters (TRI), 5%, because its significant international exposure leverages potential economic recoveries in the U.S. and Europe. Cineplex (CGX), 2.5%, has a market-leading box office share and attractive dividend yield. Going forward, we believe Cineplex’s share price may be range-bound given the strong slate of films in 2015, which will be difficult to repeat, and the higher valuation levels.

Industrials Looking for U.S. exposure and stability We added a 2.5% position We reduced DH Corporation (DH) to a 2.5% position from 5%, given the lower in Magna International; we dividend yield and the low likelihood that the company will increase its dividend believe the company will over the medium term. We added Magna International (MG), 2.5% position, continue to return capital to maintain our exposure to the global economy and believe the company will to shareholders in the form continue to return capital to shareholders in the form of dividend increases and of dividend increases and share buybacks. share buybacks. There is no change to our 2.5% position in Toromont Industries (TIH) as we like the management team and the company’s long-term dividend growth potential.

We also kept the 5% Canadian National Railway (CNR) position. While not a high yielder, the company has a long-term track record of consistently increasing its dividend, and we believe that the strong free cash flow makes the stock a good defensive alternative given the headwinds facing most sectors in Canada.

Telecommunications Lowering expectations Compared to the overall S&P/TSX Composite Index, the Telecommunications sector offers higher dividend yields and has traditionally been viewed by investors as defensive. We believe the funds flow out of Energy into the more-defensive sector has driven valuations higher and less attractive compared to the banks and REIT sector. While fundamentals still appear generally positive, we believe dividend growth rates expectations will have to be adjusted downwards because of higher financial leverage and dividend payout ratios.

June 1, 2016 | RBC Wealth Management 8 | Equity Income Guided Portfolio Magna International Inc. (TSX: MG, $53.25)

We are adding a 2.5% position in Magna International Inc. to the Magna is one of the world’s Portfolio leading auto parts suppliers. Rationale for addition Its products for cars and trucks We are adding Magna to the Equity Income Guided Portfolio for the following include panels, seats, bumpers, reasons: engines, doors, chassis, and interior and exterior components. • International exposure. MG is exposed to the global economy with 58% Over the past several years, Mag- generated from North America, 34% Europe, and the remainder in Asia. na has developed the capability • Attractive yield and ability to return capital to shareholders. MG shares to design and integrate complete currently yield 2.5%, but the company is expected increase its dividend 10% systems, including the assembly of an entire vehicle. The company annually over the next two years, according to RBC Capital Markets. In addition, operates more than 300 plants in the management team believes MG shares are undervalued and that the 28 countries. company has the ability to repurchase up to 10% of the outstanding float, by way of normal course issuer bids. • Compelling valuation. Despite Magna posting strong quarterly results and increasing its full-year guidance, MG shares continue to trade at a large discount to the peer group. RBC Capital Markets believes the discount valuation is unwarranted given the company’s earnings growth outlook, diversification, global footprint, and ability to return capital to shareholders by way of dividend increases and share buybacks.

Risks 1-year MG pricing chart

Risks include, but are not limited to, Magna International Inc. Daily 53.02 -0.12 -0.23% 8:48:11 AM VWAP:53.05 High: 73.87 Low: 43.59 Chg: -25.65% deterioration in the outlook for auto Magna International Inc. - Price 75 sales, the financial performance of 70

key customers, and pricing pressure. 65

60

55

50

45

Cv ol: 58,745 Av g: 1,102,677 2.5 Magna International Inc. - Volume

2.0

1.5

1.0

0.5

0.0 J un J ul Aug Sep Oct Nov Dec J an Feb Mar Apr May

Source - FactSet

RBC Capital Outperform Markets:

June 1, 2016 | RBC Wealth Management 9 | Equity Income Guided Portfolio DH Corporation (TSX: DH, $34.31)

We are reducing DH Corporation to a 2.5% position in the Portfolio DH’s business is organized into Rationale for reduction three areas: 1) Payment solu- We are reducing DH to a 2.5% position from a 5.0% position in the Equity Income tions—cheque printing services Guided Portfolio for the following reasons: in Canada; 2) Lending solutions— registry services, asset recovery • Lower dividend yield. A 2.5% DH position was originally introduced in the services, student loan adminis- Portfolio in spring 2013, when the dividend yield was 4.9%. We subsequently tration, and mortgage origination increased the position to 5.0% in fall 2014, when the dividend yield was 4.2%. The software in Canada; lending share price has increased 33% since inception of the position and now only yields technology products/services in 3.7%. the U.S; and 3) U.S. Enterprise solutions—core banking technol- • No dividend increases. We believe DH’s dividend is sustainable; however, we do ogy and ancillary channel. DH has not expect the company will increase the dividend until its financial leverage grown through acquisitions (Fil- improves to approximately 2.5x from 3.0x. Based on the RBC Capital Markets ogix in 2006, Resolve Business forecast, DH should be able to achieve its target financial leverage sometime after Outsourcing in 2009, Mortgage- 2017, barring any further acquisitions. bot in 2011, Harland Financial • International exposure. We continue to favour companies with exposure outside Services in 2013, and Fundtech in of Canada. DH generated approximately 55% of its 2015 revenues from foreign 2015) and others. jurisdictions.

Risks 1-year DH pricing chart Risks include, but are not limited DH Corp Daily 34.40 -0.31 -0.89% 8:43:53 AM VWAP:34.43 High: 43.85 Low: 29.12 Chg: -14.97% DH Corp - Price to, a higher-than-expected decline 44

in cheque order volumes, loss of 42

material student loan administration 40

contracts, significant decline in auto 38

sales in Canada, substantial decline 36

in housing-related lending activity 34

in Canada, and lower-than-expected 32 cross-selling opportunities. 30

28 Cv ol: 22,255 Av g: 370,242 DH Corp - Volume 1.0

0.8

0.6

0.4

0.2

0.0 J un J ul Aug Sep Oct Nov Dec J an Feb Mar Apr May

Source - FactSet

RBC Capital Outperform Markets:

June 1, 2016 | RBC Wealth Management 10 | Equity Income Guided Portfolio Portfolio companies

Agrium Inc. (AGU) – 5.0% ARC Resources (ARX) – 2.5% • Agrium operates North America’s largest agricultural retail • We believe ARC’s strong management team combined with network with a major presence in Australia. The wholesale a suite of top-rated natural gas and oil assets provides the business produces nitrogen, phosphate, and potash company with a competitive advantage, which should allow fertilizers. the company to meet or exceed its growth targets. • RBC Capital Markets expects Agrium to reach a significant • RBC Capital Markets forecasts a simple payout ratio of free cash flow inflection point this year, driven by AGU’s approximately 30% for 2017. The prolonged period of lower steady counter-cyclical retail segment, a turnaround in the oil and natural gas prices forced the company to lower its wholesale segment, and lower overall capex. dividend. RBC Capital Markets expects ARC to maintain • RBC Capital Markets believes Agrium could significantly its new dividend level in 2016–17 because of the strong increase its dividend this year given its recently increased balance sheet and hedges. payout ratio range and growing free cash flow.

AGU 2015 revenue by geography ARX dividends & cash flow per share $4 2% 66% United States $3 12% Canada $2 Europe $1 2% Australia $- 2011 2012 2013 2014 2015 2016E 2017E 19% South America Dividends per share Cash flow per share

Source - Bloomberg, Company reports Source - Bloomberg, Company reports

AltaGas (ALA) – 2.5% Bank of Montreal (BMO) – 5.0% • AltaGas is an integrated energy infrastructure and services • Compared to most Canadian banks, Bank of Montreal organization exposed to natural gas production volumes should benefit from ongoing U.S. economic growth. RBC and demand for electricity. Capital Markets believes that the U.S. business is poised for mid-single-digit earnings growth for 2016–17 due to strong loan growth and a weaker Canadian dollar. • RBC Capital Markets forecasts a small dividend increase for 2017 for a payout ratio of 46%, near the upper end of BMO’s stated 40%–50% range.

ALA 2015 revenue by segment BMO earnings & dividends per share 35% 20% Gas $10 Utility $5 Power Generation $- 2011 2012 2013 2014 2015 2016E 2017E Earnings per share Dividends per share 45%

Source - Bloomberg, Company reports Source - Bloomberg, Company reports

Some exhibits in the report may not add to 100% due to rounding.

June 1, 2016 | RBC Wealth Management 11 | Equity Income Guided Portfolio

The Bank of Nova Scotia (BNS) – 2.5% Brookfield Asset Management Inc. (BAM ’A) – 2.5% • We believe the Bank of Nova Scotia’s international banking • Brookfield Asset Management is a global alternative asset division should grow faster than domestic franchises over manager focused on property, power, and infrastructure time, although near-term growth has been held back by with over $200B under management (approximately $100B slow economic growth in the Caribbean. fee-bearing). • BNS increased its overall provision for credit losses (PC) • Given its solid track record of identifying long-term by 40% during the last quarter. The provision included opportunities, we believe BAM should be able to generate a collective allowance of $50M primarily relating to the significant returns over and above what is currently energy sector. BNS indicated this quarter’s PCL ratio should reflected in its share price. reflect the peak loss rate for 2016. • BAM continues to grow its asset management business, • RBC Capital Markets forecasts a 6% dividend increase for a which we believe will provide the company with a steadier 2017 payout ratio of 48%, near the upper end of BNS’ stated source of earnings. We expect the company will increase its 40%–50% range. dividends based on a portion of the growth rate in cash flow from operations. BNS earnings & dividends per share BAM’A 2015 revenue by geography

$8 13% 31% United States $6 5% Canada $4 $2 Australia 16% $- Europe 2011 2012 2013 2014 2015 2016E 2017E Brazil Earnings per share Dividends per share 15% 20% International

Source - Bloomberg, Company reports Source - Bloomberg, Company reports

BCE Inc. (BCE) – 5.0% Canadian National Railway (CNR) – 5.0% • BCE, Canada’s largest telecom services company by market • We view CN Railway as a best-in-class railroad based on cap, provides local, long distance, wireless, satellite, and its industry-leading operating record and commitment internet services across Canada. also owns Bell to delivering superior service. The company’s pursuit of Media. strong service and superior operations has fueled volume growth ahead of the peer group, which has driven margins, earnings, and free cash flow to record levels. • Despite a low dividend yield, CN Railway meets our investment goal of increasing exposure to U.S. and global markets. • CN Railway’s annual dividend has increased for 19 successive years. RBC Capital Markets expects the company to hike its dividend 15% in 2017.

BCE dividends per share CNR revenue ton miles

232,138 224,710 $2.60 201,496 210,133 $2.47 179,232 187,753 $2.33 $2.17 $2.22

2011 2012 2013 2014 2015 2010 2011 2012 2013 2014 2015 Source - Bloomberg, Company reports Source - Bloomberg, Company reports

June 1, 2016 | RBC Wealth Management 12 | Equity Income Guided Portfolio

CI Financial Corp. (CIX) – 2.5% DH Corporation (DH) – 2.5% • CI—one of Canada‘s largest mutual fund companies— • RBC Capital Markets believes the Harland and Fundtech manages institutional and structured product assets under acquisitions in the U.S. are transformative and significantly management, and offers brokerage services under the reduce DH’s exposure to the declining legacy cheque Assante banner. business. • RBC Capital Markets believes that the asset management • These transactions have significant implications, including sector could be negatively impacted by regulatory potential upward revisions to EPS growth forecasts, a uncertainty, potentially higher fee pressure, and challenging positive valuation re-rating, and increasing DH’s exposure macro conditions. to the faster-growing U.S. economy. • CI hiked its quarterly dividend by 11% in May. RBC Capital • RBC Capital Markets forecasts a minimal dividend increase Markets forecasts an increase of approximately 7% in 2017 for 2017 and believes dividends are safe, given the 47% and an EPS payout ratio of approximately 68%. payout ratio based on adjusted EPS.

CIX assets under management & administration DH 2015 revenue by geography

$2,000 5% 46% $1,500 48% Canada $1,000 United States $500 Other In millions $- 2012 2013 2014 2015 Assets under management Assets under administration

Source - Company reports Source - Company reports

Cineplex Inc. (CGX) – 2.5% Enbridge (ENB) – 2.5% • Cineplex is a leader in the Canadian media industry with • RBC Capital Markets believes Enbridge’s portfolio of liquids nearly 80% of Canadian movie box office share. pipelines projects will allow the company to grow earnings • Despite a challenging advertising environment and rising per share at a CAGR of 10%+ over the next few years. structural headwinds across the media sector, RBC Capital • ENB shares trade at a premium valuation to the peer group, Markets likes Cineplex’s high-quality/defensive attributes. which we believe is warranted given the company’s strong The counter-cyclical nature of box office attendance growth profile and the low interest rate environment. The makes Cineplex a key component to a diversified income recent equity issue addresses the majority of the funding portfolio as its share price tends to provide strong relative needs and should shift investors’ attention back to the performance during market downturns. above-average cash flow growth. • RBC Capital Markets is forecasting a 4% increase in the • RBC Capital Markets forecasts a 10% dividend increase for dividend for Cineplex for 2017, which would translate into a 2017, which represents a payout ratio of approximately 54% 2017 free cash flow payout ratio of approximately 79%. of ACFFO, above the 40%–50% dividend policy range.

CGX movie attendance (in millions) ENB dividends and earnings per share

71.20 72.70 73.65 77.02 $3 63.36 66.10 $2

$1

In millions $- 2012 2013 2014 2015 2016E 2017E 2010 2011 2012 2013 2014 2015 Dividends per share Earnings per share

Source - Company reports Source - Bloomberg, Company reports

June 1, 2016 | RBC Wealth Management 13 | Equity Income Guided Portfolio

Fortis Inc. (FTS) – 5.0% Hydro One Ltd. (H) – 2.5% • Fortis is a utility holding company with regulated utilities in • Hydro One has two primary business segments in , Canada, the U.S., and the Caribbean. The company also has electric transmission and electric distribution, and a very non-regulated operations in power and real estate. small telecommunications division. • The company is entering a period of significant organic • RBC Capital Markets expects a baseline 4%–4.5% EPS CAGR growth, with the five-year CAGR in rate base through 2018 through 2019 driven by low-risk utility rate base additions, expected by RBC Capital Markets to be 6%, which should with upside potential from additional transmission be supportive of dividend increases. We also like the upside investment and operational efficiencies and the possibility optionality from potential LNG-related infrastructure. of incremental growth acquisitions of smaller Ontario- • FTS has increased its dividend for 42 consecutive years. based electric local distribution companies. RBC Capital Markets forecasts an approximate 67% payout • RBC Capital Markets expects Hydro One will increase its ratio for 2017. dividend by approximately 5% in 2017, for a payout ratio slightly below 70%.

FTS dividends per share H 2015 net income by segment 1% $1.59 Transmission $1.40 $1.50 $1.16 $1.20 $1.24 $1.28 28% Distribution Telecommunications

2011 2012 2013 2014 2015 2016E 2017E 72%

Source - Bloomberg, Company reports Source - Bloomberg, Company reports

H&R REIT (HR.un) – 2.5% Intact Financial Corp. (IFC) – 5.0% • H&R is one of Canada’s largest diversified commercial • Intact Financial is one of the largest property and casualty property REITs with a $14B portfolio of office, industrial, insurance companies in Canada. and retail properties in Canada and in the U.S. Recently, • We believe the company’s defensive nature, coupled with H&R has also begun to acquire U.S. multi-family properties its leading market position and operating metrics will likely in order to continue to diversify its portfolio. continue to provide valuation support as a “safer haven” • H&R has a highly predictable cash flow stream given within the Financials sector. Further share price upside may its high percentage of triple-net leases on its non-retail also come from acquisitions or growth in book value per properties combined with its high occupancy rates. share. • H&R has increased its distribution 14% since 2012. At the • Intact recently increased its quarterly dividend 9%. RBC current level, RBC Capital Markets expects a payout ratio of Capital Markets forecasts an increase of 3% in 2017, for a approximately 83% of the 2017 AFFO per-unit estimate. payout ratio of 35%.

HR.un trailing 12-mo adj. funds from operations per unit IFC book value per share

$1.62 $37.75 $39.83 $1.44 $1.52 $1.48 $1.56 $33.03 $33.94 $1.30 $29.73 $26.47

2012 2013 2014 2015 2016E 2017E 2010 2011 2012 2013 2014 2015

Source - Bloomberg, Company reports Source - Bloomberg, Company reports

June 1, 2016 | RBC Wealth Management 14 | Equity Income Guided Portfolio

Inter Pipeline Ltd. (IPL) – 2.5% Manulife Financial Corp. (MFC) – 5.0% • Inter Pipeline holds interests in crude oil pipeline systems • Manulife is Canada’s largest insurer and a leading global and natural gas liquid extraction facilities in Western provider of wealth management products and services. Canada as well as liquids storage businesses in Europe. • Manulife believes it can deliver $4B in core earnings in • We continue to view Inter Pipeline as an attractive way to 2016, mainly driven by volume contribution and, to a lesser gain exposure to oil sands volume growth. The company’s extent, by higher margins. Going forward, we believe the unutilized capacity could propel the share price higher; share price should benefit from lower earnings volatility however, the challenging oil environment may limit near- because sensitivities to movements in equity markets and term upside. interest rates have declined significantly. • RBC Capital Markets forecasts a 6% dividend increase in • Manulife recently increased its annual dividend by 9%. RBC 2017, for an AFFO payout ratio of approximately 80%. Capital Markets forecasts a dividend payout ratio of 40% in 2017.

IPL dividends & adjusted funds from operations MFC earnings & dividends per share $3 $3 $2 $2 $1 $1 $- $- 2012 2013 2014 2015 2016E 2017E 2011 2012 2013 2014 2015 2016E 2017E Dividends per share Adjusted funds from operations Earnings per share Dividends per share

Source - Bloomberg, Company reports Source - Bloomberg, Company reports

Magna International Inc. (MG) – 2.5% (NA) – 5.0% • MG is one of the world’s leading auto parts suppliers with a • National Bank is the smallest of the Big Six Canadian banks diversified product suite. It also has the capability to design and operates mainly in Canada. Slower economic growth in and integrate complete systems, including the assembly of Canada means NA’s valuation discount should remain for an entire vehicle. It operates over 300 plants in 28 countries. the medium term. • North American auto sales have approached the long- • Slower investment banking earnings growth and higher term trend line while RBC Capital Markets projects global loan losses are likely to temper 2016 EPS growth. NA was production to grow at a 3% CAGR through the end of the the first Canadian bank to record a general provision decade. We expect higher utilization rates to drive higher equivalent to approximately 8% of its oil & gas loans. margins. • RBC Capital Markets forecasts a 7% dividend increase • It continues to deploy excess balance sheet capacity via a for 2017, for a payout ratio of 46%, near the mid-point of combination of acquisitions, buybacks, and dividend hikes. National’s stated 40%–50% range. RBC Capital Markets expects MG will increase its dividend by 6% in 2017, for a payout ratio of approximately 25%. MG 2015 sales by geographic breakdown NA earnings & dividends per share 6% 1% $6 58% North America Europe $4 Asia $2 Rest of world $- 2011 2012 2013 2014 2015 2016E 2017E 34% Earnings per share Dividends per share

Source - Bloomberg, Company reports Source - Bloomberg, Company reports

June 1, 2016 | RBC Wealth Management 15 | Equity Income Guided Portfolio

Royal Bank of Canada (RY) – 5.0% SmartREIT (SRU .un) – 2.5% • Royal Bank is Canada’s largest bank by assets and market • SmartREIT owns interests in approximately 150 capitalization, offering a full range of personal, commercial, predominately Wal-Mart-anchored shopping centres, and corporate banking services. Earnings are split between comprising more than 30 million square feet of gross Canadian Banking, Capital Markets, Wealth Management, leasable area (GLA) across all 10 Canadian provinces. and U.S. & International Banking. • Its property expansion and development pipeline encompasses almost five million square feet of development potential, including the first phase of the Vaughan Metropolitan Centre. Wal-Mart represents approximately 27% of SmartREIT’s gross revenue. • RBC Capital Markets forecasts a 4% distribution increase in 2017, for an AFFO payout ratio of 78%

RY earnings & dividends per share SRU.un adjusted funds from operations per unit

$8 $2.49 $6 $2.08 $1.85 $1.99 $4 $2 $- 2011 2012 2013 2014 2015

Earnings per share Dividends per share 2014 2015 2016E 2017E

Source - Bloomberg, Company reports Source - Bloomberg, Company reports

Shaw Communications (SJR’B) – 5.0% Suncor Energy Inc. (SU) – 2.5% • SJR’B is one of Canada’s largest telecom operators offering • Suncor Energy has reengineered itself into a best-of-breed cable, internet, and telephony services in Western Canada. global integrated oil producer that consistently provides Earlier this year, Shaw acquired WIND Mobile. upstream growth, capital discipline, and cost containment. • RBC Capital Markets believes the entry into wireless and • Suncor’s downstream operations, which benefit from lower divestiture of broadcasting have significantly improved oil prices and a strong balance sheet, should allow it to Shaw’s quality of the revenue mix and added a major boost weather current oil market conditions and still proceed to the revenue growth profile of the stock. with its oil sands and offshore development projects. • However, we believe the increased capex requirements • The company recently increased its dividend 4% and associated with the wireless segment will force elected to renew its share buyback program, which is a management to differ dividend growth over the next two testament to management’s commitment to return capital years. RBC Capital Markets believes the SJR’B dividend is to shareholders. We do not expect a dividend increase in sustainable but notes that the payout ratio will likely remain 2017. over 100% for the next two years before improving in 2018. SJR’B 2015 Revenue per division SU operating earnings by division

75% 6000 2015 2016E 2017E Oil Sands 50% 5000 4000 Exploration & Production 25% 3000 0% 2000 Refining/Marketing 1000 0 Media

Infra. -1000 Wireless Network Services Services Business Business

Consumer 2011 2012 2013 2014 2015

Source - Bloomberg, Company reports Source - Bloomberg, Company reports

June 1, 2016 | RBC Wealth Management 16 | Equity Income Guided Portfolio

TD Bank (TD) – 5.0% Toromont Industries Ltd. (TIH) – 2.5% • TD Bank is well positioned to record above-average revenue • Toromont sells, rents, and services a broad range of growth in Canada and the U.S. TD’s diversification outside Caterpillar mobile equipment and industrial engines in of Canada should be viewed more positively, in our view, as most of Eastern Canada. Toromont also runs Cimco, an the U.S. economy continues to improve. industrial and recreational refrigeration business. • RBC Capital Markets continues to believe TD should grow • We view Toromont as a “best-in-class” defensive firm with EPS faster than should the Canadian peer group in 2016–17, strong operating margins and balance sheet flexibility. driven by above-average loan growth in the U.S. and lower We believe the valuation premium is warranted given exposure to Alberta than peers. its positive earnings growth outlook and potential for • RBC Capital Markets expects an 8% hike to TD’s 2017 acquisition growth. dividend, for a 46% payout ratio. • Toromont’s current dividend yield is below our target level; however, given TIH’s 26-year history of increasing its dividend and low payout ratio, we are confident the dividend will grow. TD earnings & dividends per share TIH dividends & diluted earnings per share (adjusted) $6 $3 $4 $2

$2 $1

$- $- 2011 2012 2013 2014 2015 2016E 2017E 2011 2012 2013 2014 2015 2016E 2017E Earnings per share Dividends per share Dividends per share Diluted earnings per share (adj)

Source - Bloomberg, Company reports Source - Bloomberg, Company reports

Thomson Reuters Corporation (TRI) – 5.0% TransCanada Corporation (TRP) – 2.5% • Thomson Reuters—an information provider for the world’s • TransCanada’s assets include natural gas pipelines, power businesses—should benefit from a global economic generation, and natural gas storage. We think TRP shares recovery. offer an attractive entry point for investors seeking good • Thomson generates the majority of its revenue outside value with a long-term investment horizon, but do not of Canada, which should be positive as we believe the anticipate any near-term catalyst given the inexpensive Canadian dollar is likely to remain under pressure. valuation and visible project growth. Management has indicated that organic revenue growth • TransCanada reiterated its 8%–10% dividend per share remains the priority. We continue to see modest annual CAGR to 2020. The company’s confidence is underpinned dividend increases as well as the current US$1.5B NCIB as by the small to medium-sized growth projects having a the priority usage for excess free cash flow. lower degree of execution risk. • It has raised the dividend annually for the past 22 years. RBC Capital Markets expects a small dividend increase for 2017. TRI 2015 revenues by geography TRP earnings & dividends per share $3 10% 60% Americas $2 Europe, Middle East, and Africa $1 Asia $- 2011 2012 2013 2014 2015 2016E 2017E 30% Dividends per share Earnings per share

Source - Bloomberg, Company reports Source - Bloomberg, Company reports

June 1, 2016 | RBC Wealth Management 17 | Equity Income Guided Portfolio Risks

Agrium: Risks include, but are not limited to, unpredictable Cineplex: Risks include, but are not limited to, the quality weather affecting agricultural inputs, foreign exchange impact and success of new motion pictures, erosion in the appeal on earnings and cash flows, volatile nature of input costs and of premium theatrical offerings such as 3D, rollout of new realized prices, and fluctuations in sales of its retail division. theatres by competitors, competition from other distribution channels, and changes to the company’s relationship with AltaGas: This security is restricted pursuant to RBC Capital film distributors. Markets policy and, as a result, its continued inclusion in the Equity Income Guided Portfolio has not been reviewed or DH Corporation: Risks include, but are not limited to, a confirmed as of the date hereof. higher-than-expected decline in cheque order volumes, loss of material student loan administration contracts, significant ARC Resources: Risks include, but are not limited to, changes decline in auto sales in Canada, substantial decline in in crude oil and natural gas prices, reservoir performance, housing-related lending activity in Canada, and lower-than- lower production growth profile, replacement risks arising expected cross-selling opportunities. from other reservoirs that have a lower cost base, and the effect of foreign exchange and government legislation as it Enbridge: Risks include, but are not limited to, the ability relates to royalties, income taxes, and environmental policy. to fund and complete new projects to support the annual dividend growth of 10% over the medium term, lower volumes Bank of Montreal: Risks include, but are not limited to, the on the Mainline, as well as reliance on new oil projects in health of the overall economy, sustained deterioration in the North America. capital markets environment, the U.S. and Canadian housing markets, and greater-t han-anticipated impact from off- Fortis: Risks include, but are not limited to, punitive balance sheet commitments. regulatory or government decisions, deteriorating economic conditions in its service territories, ability to successfully The Bank of Nova Scotia: Risks include, but are not limited close the ITC transaction, and quick rise in government bond to, the health of the overall economy, sustained deterioration yields. in Latin America and the capital markets environment, greater-than-anticipated impact from off-balance sheet H&R REIT: Risks include, but are not limited to, the commitments, rising Canadian dollar, and increasing ownership of real property, deteriorating economic business loan losses. conditions, competition, rise in bond yields, or a loss of a major tenant. Further weakness in the Energy sector could BCE: This security is restricted pursuant to RBC Capital hamper the REIT’s assets values in Alberta. Markets policy and, as a result, its continued inclusion in the Equity Income Guided Portfolio has not been reviewed or Hydro One: Risks include, but are not limited to, rising confirmed as of the date hereof. interest rates, government intervention, adverse regulatory intervention, and the inability to achieve meaningful cost Brookfield Asset Management:Risks include, but are not synergies or complete growth initiatives. limited to, rising interest rates, hard cyclical downturn in the commercial property sector, and any economic shock that Intact Financial: Risks include, but are not limited to, could cause lending spreads to widen and/or loan value ratios catastrophe-related losses, variable profitability, political to decline. uncertainty (especially in Ontario), acquisition and integration risk, reserve adequacy, and volatility in its Canadian National Railway: Risks include, but are not limited investment portfolio. to, extreme fluctuations in fuel prices, unusual weather conditions that could impact grain crops or railway operating Inter Pipeline: Risks include, but are not limited to, a efficiencies, and weaker-than-anticipated economic material decline in throughput on the conventional oil conditions. gathering system where the impact cannot be offset via toll management, prolonged decline in frac spreads, inability CI Financial: Risks include, but are not limited to, a pullback to commission new projects on time and on budget, ability in equity markets, performance deterioration, pricing to secure new oil pipeline projects and acquisitions, or new pressure, and reduction of its historical valuation premium projects that fail to gain investor confidence. compared to its publicly traded competitors.

June 1, 2016 | RBC Wealth Management 18 | Equity Income Guided Portfolio

Magna International: Risks include, but are not limited operations, lower demand for its refrigeration division, to, deterioration in the outlook for auto sales, the financial negative macroeconomic trends, lower commodity prices, as performance of key customers, and pricing pressure. well as strategy execution and labour relations.

Manulife Financial: Risks include, but are not limited to, TransCanada: Risks include, but are not limited to, reduced persistently low interest rates, deteriorating equity markets, gas flows on the Canadian Mainline, inability to complete new adequacy of actuarial assumptions, changes to accounting projects, and large disconnect between actual and forecast and regulatory rules, unfavourable political and/or economic power and natural gas prices. developments in Asia, and appreciation in the Canadian dollar.

National Bank of Canada: Risks include, but are not limited to, the health of the overall economy, particularly Quebec’s; sustained deterioration in the capital markets environment; integration risk of acquisitions; change in the competitive/ political environment in Quebec; additional write-downs related to asset-backed commercial paper; and higher-than- expected loan losses in its energy loan portfolio.

Royal Bank of Canada: NA

Shaw Communications: Risks include, but are not limited to, greater-than-expected wireless capex, market share losses in Western Canada, and a pricing war among incumbent Canadian telco and cable companies.

SmartREIT: Risks include, but are not limited to, the ownership of real property, deteriorating economic conditions, competition, rise in bond yields, or loss of a major tenant.

Suncor Energy: Risks include, but are not limited to, an unexpected change in crude oil and natural gas prices, inability to replace production and reserves in a cost- effective manner, reservoir performance, profitability of its downstream operations, foreign exchange impact, and government legislation as it relates to royalties, income taxes, and environmental policy.

TD Bank: Risks include, but are not limited to, the health of the overall economy, sustained deterioration in the capital markets environment, a turndown in the Canadian and U.S. housing markets, failure of government programs, and greater-than-anticipated impact from off-balance sheet commitments.

Thomson Reuters: Risks include, but are not limited to, a stronger Canadian dollar; cyclical downturn in financial markets and/or major deterioration in the global economic outlook; further broker bankruptcies and/or major broker consolidation and restructuring; and inability to complete the Eikon rollout and migration.

Toromont Industries: Risks include, but are not limited to, lower demand for large equipment required for infrastructure, construction, or mining operations in Eastern Canada, replacement risks from new competitors in their area of

June 1, 2016 | RBC Wealth Management 19 | Equity Income Guided Portfolio Methodology The objective of the Equity Income Guided Portfolio (EIGP) is to provide investors with an attractive rate of current income with the potential for growing cash flow plus long-term capital appreciation by investing in a diversified Portfolio of higher-yielding Canadian securities, such as common stocks, Real Estate Investment Trusts (REITs), and income trusts that trade on the S&P/ TSX Composite Index. This Portfolio consists of approximately 20–30 stocks and may be appropriate for investors who have a moderate risk tolerance in relation to an equity investment. Because of its focus on income and income growth, this Portfolio would ordinarily exhibit greater defensive characteristics relative to the broad equity market during bear markets and may underperform during bull markets.

The top-down strategy process employed by RBC Capital Markets plays a different role in the EIGP process than with our other Guided Portfolios. While the recommended sector “overweights” and “underweights” are taken into consideration, the Investment Committee aims to diversify the Portfolio adequately across the four broader economic sectors (interest sensitive, consumer, industrial, and resources), even though dividends may be modest. In this way, we address one of the most common pitfalls inherent in income investing: investors who focus too narrowly on the size of the dividend will more than likely find themselves heavily concentrated in the financial and utility sectors, which tend to react negatively to rising interest rates.

Once the “sector weights” are established, an eligible universe of securities is determined. Careful consideration is given to identifying a pool of fundamentally preferred companies that have the potential to return, on a sustainable basis, a significant amount of cash flow to investors. The resulting universe will consist of securities with either an attractive dividend yield or a yield that may appear less attractive, but that we believe have strong potential for growth. In addition, companies that, in our view, pay out too high a percentage of their cash flows in dividends or distributions will be excluded.

Additional factors analyzed include a company’s financial strength and debt levels, the amount of cash generated by the business relative to capital expenditure requirements, its longer-term return on capital, the proportion of income paid out versus reinvested, historical and forecast dividend growth rates, and trading liquidity.

The current dividend yield for the S&P/TSX Composite Index is approximately 3.06%; the EIGP currently offers investors a yield of approximately 3.85% plus the potential for capital appreciation and an inflation hedge.

June 1, 2016 | RBC Wealth Management 20 | Equity Income Guided Portfolio Disclosures and disclaimers

Equity Income Guided Portfolio Investment Committee with sector average over 12 months. Underperform (U): Returns expected to Dominick Hardy, CA, CFA be materially below sector average over 12 months. [email protected]; RBC Dominion Securities Inc. Risk Rating: Mark Allen, CFA As of March 31, 2013, RBC Capital Markets, LLC suspends its Average and [email protected]; RBC Dominion Securities Inc. Above Average risk ratings. The Speculative risk rating reflects a security’s Jean-Francois Dion, CFA lower level of financial or operating predictability, illiquid share trading vol- [email protected]; RBC Dominion Securities Inc. umes, high balance sheet leverage, or limited operating history that result in Patrick McAllister a higher expectation of financial and/or stock price volatility. [email protected]; RBC Dominion Securities Inc. This report is issued by the Portfolio Advisory Group (“PAG”) which is part of RBC Capital Markets has fundamental research of the following companies: the retail division of RBC Dominion Securities Inc. (“RBC DS”). The PAG provides Magna International (MG; Outperform; $53.25) portfolio advisory services to RBC DS Investment Advisors. Reports published Bank of Montreal (BMO; Sector Perform; $82.30) by the PAG may be made available to clients of RBC DS through its Investment The Bank of Nova Scotia (BNS; Outperform; $64.14) Advisors. The PAG relies on a number of different sources when preparing its National Bank of Canada (NA; Sector Perform; $43.52) reports including, without limitation, research reports published by RBC Capital Markets (“RBC CM”). RBC CM is not independent of RBC DS or the PAG. RBC CM -Dominion Bank (TD; Outperform; $57.11) is a business name used by Royal Bank of Canada and certain of its affiliates, CI Financial Corp. (CIX; Sector Perform; $28.70) including RBC DS, in connection with its corporate and investment banking Brookfield Asset Management Inc. (BAM; Outperform; $46.02) activities. As a result of the relationship between RBC DS, the PAG and RBC Manulife Financial Corporation (MFC; Outperform; $19.52) CM, there may be conflicts of interest relating to the RBC CM analyst that is Intact Financial Corp. (IFC; Outperform; $91.70) responsible for publishing research on a company referred to in a report issued H&R Real Estate Investment Trust (HR.UN; Sector Perform; $21.22) by the PAG. SmartREIT (SRU.UN; Outperform, $34.50) Required Disclosures BCE Inc. (BCE; Restricted; $60.45) Fortis Inc. (FTS; Outperform; $41.02) RBC Capital Markets Distribution of Ratings Hydro One Ltd. (H; Outperform; $24.44) For purposes of ratings distributions, regulatory rules require member firms Thomson Reuters Corporation (TRI; Sector Perform; $55.07) to assign ratings to one of three rating categories −Buy, Hold/Neutral, or Cineplex Inc. (CGX; Sector Perform; $51.57) Sell− regardless of a firm’s own rating categories. Although RBC Capital Markets’ ratings of Top Pick/Outperform, Sector Perform and Underperform Shaw Communications Inc. (SJR.B; Sector Perform; $25.08) most closely correspond to Buy, Hold/Neutral and Sell, respectively, the Canadian National Railway Company (CNR; Outperform; $77.75) meanings are not the same because our ratings are determined on a relative DH Corporation (DH; Outperform; $34.31) basis (as described below). Toromont Industries Ltd. (TIH; Outperform; $36.83) Distribution of Ratings - RBC Capital Markets, LLC Equity Research ARC Resources Ltd. (ARX; Outperform; $21.57) As of March 31, 2016 Suncor Energy Inc. (SU; Outperform; $36.22) Investment Banking Services Enbridge Inc. (ENB; Outperform; $52.28) Provided During Past 12 Months Rating Count Percent Count Percent TransCanada Corporation (TRP; Outperform; $54.34) Buy [Top Pick & Outperform] 887 51.78 258 29.09 AltaGas Ltd. (ALA; Restricted; $30.31) Hold [Sector Perform] 722 42.15 115 15.93 Inter Pipeline Ltd. (IPL; Outperform; $26.65) Sell [Underperform] 104 6.07 8 7.69 Agrium Inc. (AGU; Outperform; $118.35)

Explanation of RBC Capital Markets, LLC RBC Capital Markets analysts have received (or will receive) compensa- Equity Rating System tion based in part upon the investment banking revenues of RBC Capital An analyst’s “sector” is the universe of companies for which the analyst Markets. provides research coverage. Accordingly, the rating assigned to a particular Portfolio Advisory Group personnel, including the portfolio advisor or stock represents solely the analyst’s view of how that stock will perform over any individuals directly involved in the preparation of the report hold(s) the next 12 months relative to the analyst’s sector average. Although RBC or exercise(s) investment discretion over a long position in the common Capital Markets, LLC ratings of Top Pick (TP)/Outperform (O), Sector Perform shares of Agrium, Inc., AltaGas, ARC Resources Ltd., The Bank of Nova (SP), and Underperform (U) most closely correspond to Buy, Hold/Neutral Scotia, BCE Inc., Brookfield Asset Management Inc., Canadian National and Sell, respectively, the meanings are not the same because our ratings Railway Company, CI Financial Corp., DH Corporation, Enbridge Inc., Magna are determined on a relative basis (as described below). International Inc., Manulife Financial Corporation, National Bank of Canada, Ratings Royal Bank Of Canada, Shaw Communications Inc., Suncor Energy Inc., Top Pick (TP): Represents analyst’s best idea in the sector; expected to Thomson Reuters Corporation, Toromont Industries Ltd., Toronto-Dominion provide significant absolute total return over 12 months with a favorable Bank, and TransCanada Corporation. risk-reward ratio. Outperform (O): Expected to materially outperform sector The portfolio advisor responsible for this report or a member of his/her average over 12 months. Sector Perform (SP): Returns expected to be in line

June 1, 2016 | RBC Wealth Management 21 | Equity Income Guided Portfolio teamhold(s) or exercise(s) investment discretion or control over a long po- companies, please go to https://www.rbccm.com/GLDisclosure/PublicWeb/ sition in the non-convertible fixed income securities of Agrium Inc., Bank of DisclosureLookup.aspx?EntityID=1. Montreal, BCE, The Bank of Nova Scotia, H&R Real Estate Investment Trust, Such information is also available upon request to RBC Dominion Securities, National Bank of Canada, Royal Bank Of Canada, and Shaw Communications Attention: Manager, Portfolio Advisory Group, 155 Wellington Street West, Inc. 17th Floor, Toronto, ON M5V 3K7. Portfolio Advisory Group personnel, including the portfolio advisor or any The authors are employed by RBC Dominion Securities Inc., a securities individuals directly involved in the preparation of the report hold(s) or broker-dealer with principal offices located in Toronto, Canada. exercise(s) investment discretion over a long position in warrants, rights The Global Industry Classification Standard (“GICS”) was developed by or securities convertible into the common shares of Fortis Inc., Manulife and is the exclusive property and a service mark of MSCI Inc. (“MSCI”) and Financial Corporation, and Royal Bank Of Canada. Standard & Poor’s Financial Services LLC (“S&P”) and is licensed for use by A household member or members of the Portfolio Advisory Group hold(s) or RBC. Neither MSCI, S&P, nor any other party involved in making or compiling exercise(s) investment discretion over a long position in the common shares the GICS or any GICS classifications makes any express or implied warran- of Agrium Inc. and Canadian National Railway Company. ties or representations with respect to such standard or classification (or the results to be obtained by the use thereof), and all such parties hereby RBC Capital Markets Conflicts Policy expressly disclaim all warranties of originality, accuracy, completeness, mer- RBC Capital Markets Policy for Managing Conflicts of Interest in Relation to chantability and fitness for a particular purpose with respect to any of such Investment Research is available from us on request. To access our current standard or classification. Without limiting any of the foregoing, in no event policy, clients should refer to https://www.rbccm.com/global/file-414164. shall MSCI, S&P, any of their affiliates or any third party involved in making pdf or send a request to RBC Capital Markets Research Publishing, P.O. Box or compiling the GICS or any GICS classifications have any liability for any 50, 200 , Royal Bank Plaza, 29th Floor, South Tower, Toronto, direct, indirect, special, punitive, consequential or any other damages Ontario M5J 2W7. We reserve the right to amend or supplement this policy (including lost profits) even if notified of the possibility of such damages. at any time. Disclaimer Dissemination of Research & Short Term Ideas The information contained in this report has been compiled by RBC Domin- RBC Capital Markets endeavours to make all reasonable efforts to provide ion Securities Inc. (“RBC DS”) from sources believed by it to be reliable, but research simultaneously to all eligible clients, having regard to local time no representations or warranty, express or implied, are made by RBC DS or zones in overseas jurisdictions. Subject to any applicable regulatory con- any other person as to its accuracy, completeness or correctness. All opin- siderations, “eligible clients” may include RBC Capital Markets institutional ions and estimates contained in this report constitute RBC DS’ judgment clients globally, the retail divisions of RBC Dominion Securities Inc. and RBC as of the date of this report, are subject to change without notice and are Capital Markets LLC, and affiliates. RBC Capital Markets’ equity research is provided in good faith but without legal responsibility. This report is not an posted to our proprietary websites to ensure eligible clients receive coverage offer to sell or a solicitation of an offer to buy any securities. Additionally, initiations and changes in rating, targets and opinions in a timely manner. this report is not, and under no circumstances should be construed as, a Additional distribution may be done by the sales personnel via email, fax or solicitation to act as securities broker or dealer in any jurisdiction by any regular mail. Clients may also receive our research via third party vendors. person or company that is not legally permitted to carry on the business of Please contact your investment advisor or institutional salesperson for more a securities broker or dealer in that jurisdiction. This material is prepared information regarding RBC Capital Markets research. RBC Capital Markets for general circulation to Investment Advisors and does not have regard also provides eligible clients with access to SPARC on its proprietary INSIGHT to the particular circumstances or needs of any specific person who may website. SPARC contains market color and commentary, and may also con- read it. RBC DS and its affiliates may have an investment banking or other tain Short-Term Trade Ideas regarding the securities of subject companies relationship with some or all of the issuers mentioned herein and may trade discussed in this or other research reports. A Short-Term Trade Idea reflects in any of the securities mentioned herein either for their own account or the the research analyst’s directional view regarding the price of the security accounts of their customers. RBC DS and its affiliates may also issue options of a subject company in the coming days or weeks, based on market and on securities mentioned herein and may trade in options issued by others. trading events. A Short-Term Trade Idea may differ from the price targets Accordingly, RBC DS or its affiliates may at any time have a long or short and/or recommendations in our published research reports reflecting the re- position in any such security or option thereon. Neither RBC DS nor any of search analyst’s views of the longer-term (one year) prospects of the subject its affiliates, nor any other person, accepts any liability whatsoever for any company, as a result of the differing time horizons, methodologies and/or direct or consequential loss arising from any use of this report or the infor- other factors. Thus, it is possible that the security of a subject company that mation contained herein. This report may not be reproduced, distributed or is considered a long-term ‘Sector Perform’ or even an ‘Underperform’ might published by any recipient hereof for any purpose. be a short-term buying opportunity as a result of temporary selling pressure In all jurisdictions where RBC Capital Markets conducts business, we do not in the market; conversely, the security of a subject company that is rated offer investment advice on Royal Bank of Canada. Certain regulations pro- a long-term ‘Outperform’ could be considered susceptible to a short-term hibit member firms from soliciting orders and offering investment advice or downward price correction. Short-Term Trade Ideas are not ratings, nor are opinions on their own stock. References to Royal Bank are for informational they part of any ratings system, and RBC Capital Markets generally does not purposes only and not intended as a direct or implied recommendation for intend, nor undertakes any obligation, to maintain or update Short-Term investing in Royal Bank and all related securities. Trade Ideas. Short-Term Trade Ideas discussed in SPARC may not be suitable for all investors and have not been tailored to individual investor circum- RBC Dominion Securities Inc.* and Royal Bank of Canada are separate cor- stances and objectives, and investors should make their own independent porate entities which are affiliated. *Member-Canadian Investor Protection decisions regarding any Short-Term Trade Ideas discussed therein. Fund. RBC Dominion Securities Inc. is a member company of RBC Wealth Management, a business segment of Royal Bank of Canada. ®Registered Conflict Disclosures trademarks of Royal Bank of Canada. Used under licence. ©2016 Royal In the event that this is a compendium report (covers six or more subject Bank of Canada. All rights reserved. companies), RBC DS may choose to provide specific disclosures for the sub- ject companies by reference. To access RBC CM’s current disclosures of these

June 1, 2016 | RBC Wealth Management