Cecilia Mo: Portfolio manager will give firms a nudge in the dividend direction if it looks like they can’t use their money to grow through strategic acquisitions.TIBOR KOLLEY/The Globe and Mail
Yield-starved investors can feast on a growing buffet of dividend payers and dividend boosters. But it is also possible to reap extra gains by sniffing out whether a company is expected to initiate a payout or raise one substantially.
These shares could enjoy a nice pop as dividend hikes can attract new investors. Share of car parts maker Martinrea International Inc. jumped more than 7 per cent on Friday after the company said it would begin paying a 3 cent quarterly dividend. When Suncor Energy Inc. hiked its quarterly payout by 54 per cent to 20 cents a week ago, its stock jumped 6 per cent the next day. In both cases, company stocks were starting to rise ahead of the news.
Money managers may accumulate shares in a company if they anticipate it will join the dividend club or raise the payout. Some will lobby management teams, or make that kind of calculated bet based largely on a company's rising free cash flow.
Robert Gill, a portfolio manager with Aston Hill Financial Inc., bought shares in Martinrea in mid-April at close to $8 a share after doing other homework on the company. "We did anticipate the dividend as part of the catalyst to propel the stock higher," he said. He had also increased his holdings in Suncor because he was anticipating a healthy dividend increase. "Suncor was not really viewed as a dividend stock because it had a small yield," he said. "With this boost [last week] it probably will attract more of a yield-hungry investor."
Cecilia Mo, a portfolio manager with GCIC Ltd. who runs dividend and stock funds under the Dynamic brand, will give firms a nudge in the dividend direction if it looks like they can't use their money to grow through strategic acquisitions.
"Companies are also more willing to return cash to shareholders now because they don't see a lot of great investment opportunities in a slow-growth environment," said Ms. Mo, a value investor. "A lot more companies – even in a very lumpy business like lumber or oriented strand board – realize that they have to pay shareholders [to attract investors]."
She owns shares of CGI Group Inc. in her dividend fund even though the information technology company doesn't offer a payout. But she is convinced it will do so within 18 months. CGI has been making a lot of acquisitions over the past couple of years, including last summer's $2.7-billion purchase of British IT services company Logica PLC. "They are going to have much stronger free cash flow" with this acquisition, she said.
She also expects a healthy dividend increase from Canadian Energy Services & Technology Corp., which has a 66-cent-per-share annual dividend for a 5-per-cent yield. "By the end of the year, we are expecting another dividend increase of about 15 to 20 per cent."
Michael Simpson, a portfolio manager at Sentry Investments, said that retail investors can try to predict dividend increases by watching cash flows from quarter to quarter. He expects waste management company Republic Services Inc. to raise its dividend by about 10 per cent this year, and Canexus Corp., a producer of specialty chemicals, to boost its payout by more than 10 per cent within the next 12 months.
The U.S. tech sector is one area where investors could see higher payouts, he said. "We are expecting more dividends increases from Microsoft and Intel that are greater than 6 per cent. … They are not always going to be 50 per cent [like Suncor] because these are large companies with a lot of shares outstanding."