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What are we looking for?

Big-yield stocks are nice, but only if the payouts are sustainable. Today's screen seeks not only companies with attractive dividends and healthy payout ratios, but also with momentum and a realistic chance of growth ahead.

How we did it

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In crunching today's numbers, Sudip Ghosh, senior consultant at Morningstar CPMS, used return on equity (ROE) and analyst revisions over the past three months to get a read on each companies' chances of good growth and momentum.

Mr. Ghosh started with the top 30th percentile of stocks in the CPMS universe and then restricted his search to companies with a market capitalization of greater than $300-million. His other criteria included a trailing dividend yield in excess of 2 per cent, a payout ratio based on earnings per share of below 80 per cent and a payout ratio based on cash flow of less than 50 per cent.

To make the cut, companies also had to be generating ROE in excess of 10 per cent. Finally, analysts' revisions over the last three months of both earnings and cash flow could be no worse than a 5-per-cent reduction.

More about Morningstar

Morningstar Inc. provides independent investment research in North America, Europe, Australia and Asia. Its investment research tool, Morningstar CPMS, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers. CPMS data cover more than 95 per cent of the investable North American stock market.

What we found

Industrial Alliance Insurance and Financial Services Inc. ranks as the top company in terms of combined dividend yield and growth potential. The stock has been yielding a bit more than 2.6 per cent of late. While that is near the low end on this list, the life and health insurance company boasts the lowest payout ratio in terms of cash flow, which suggests it is well positioned to boost the dividend.

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Rounding out the list is Contrans Group Inc., which provides trucking and logistics services throughout North America. The transportation company raised its dividend by 25 per cent at the start of the year.

While the 11 companies on the list would seem to be in a good position to continue raising dividends, it's important to remember that earnings and cash flow can vary from year to year so payout ratios should be treated only as a guide, not as an inflexible number.

Do your own research before buying any of the stocks listed here.

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