When Renato Anzovino surveys the dividend stock landscape, he sees plenty of fine companies – but not a lot of attractive prices.
That would explain why the C.F.G. Heward Canadian Dividend Growth Fund he manages is sitting on a hefty cash balance of 8.5 per cent.
"Of the stocks I follow, a lot of them are on the higher end of their valuation range, so it doesn't lead me to rush in and buy," said the portfolio manager with C.F.G. Heward Investment Management in Montreal. "I'll just wait for some market pullbacks to deploy some of the excess cash that I have."
Judging by the fund's performance, his patient approach has paid off.
From inception on June 30, 2009, through Dec. 31, 2011, the fund returned an annualized 10.26 per cent compared with 8.75 per cent for the S&P/TSX composite index. (Both results include dividends.) The fund's return is before fees, which range from 1 per cent to 2 per cent depending on the amount invested and whether the fund was purchased directly or through a third party, he said.
Before you rush out to invest in the fund yourself, we should point out that it's a pooled fund – essentially a private mutual fund – available to clients who invest a minimum of $150,000 or qualify as "accredited investors." As such, you won't find it in Globeinvestor's mutual fund listings.
Also bear in mind that the $13-million fund has a limited track record and was launched near the bottom of the bear market, at a time when dividend stocks in general were poised for big gains.
Those caveats aside, it's worth digging into Mr. Anzovino's stock-selection process because there are lessons here for do-it-yourself dividend investors. We'll also look at a sample of his current holdings, which range from the usual dividend suspects – banks, telecoms, pipelines and energy producers, for example – to some less obvious names.
Stock selection process
When choosing companies, he looks for those with:
An easily understandable business
A minimum yield of 1.5 per cent
A history of dividend increases and growing cash flow to support future dividend hikes
Valuation is another key consideration. Mr. Anzovino keeps a spreadsheet with target prices for stocks he wants to buy, and only takes a swing when the price falls into his strike zone. That removes emotion from the equation and prevents him from overpaying for a stock.
"The market is very volatile, so you get opportunities to buy your stocks at your price," he said.
Some current holdings
Yield: 1.6 per cent
Last dividend increase: February, 2012
Comment: "It's not the highest of yields, but it's one of the stocks that can probably increase the dividend the most going forward. It's a great business model that is making a lot of money and will continue to make a lot of money, and they have a shareholder-friendly attitude," he said. Tims' U.S. expansion has been tough sledding, but the chain is gaining traction south of the border. He would consider adding to his position if the stock dropped below $51.
Yield: 1.8 per cent
Last raised its dividend: August, 2011
Comment: "People are going to eat pizza every once in a while, even if times get tough," he said of the cheese and dairy products maker. Saputo's earnings per share have grown at an average annual rate of about 19 per cent over the past five years, and its dividend has risen about 13 per cent annually as the company expands in the United States, South America and Europe. The stock's a bit expensive, but he'd buy more if it drops below $39.
Yield: 4.1 per cent
Last raised its dividend: January, 2012
Comment: The pay and specialty TV company's brands include YTV, Treehouse, W Network and Movie Central, in addition to radio stations, over-the-air TV channels and children's content producer Nelvana. "They generate a tremendous amount of free cash flow," he said. With Astral Media being gobbled up by BCE, there is speculation that Corus – which is controlled by the Shaw family – could be taken private by Shaw Communications. Mr. Anzovino added to his position when the price dropped to $19 a few months ago.
Yield: 1.7 per cent
Last raised its dividend: April, 2011
Comment: "They finally got their act together once they sold their U.S. assets … and decided to focus on Quebec," he said of the province's biggest pharmacy chain, which stands to benefit as aging boomers consume more prescription drugs. The yield is small but Jean Coutu has been increasing its dividend at an annual rate of about 15 per cent over the past five years. He trimmed his position recently but would consider buying if the stock got down to $12.