John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.
When Anil Tahiliani surveys the investing landscape, he doesn't see a lot of screaming bargains.
"It's getting harder to find value," says the portfolio manager with McLean & Partners Wealth Management in Calgary. "There's no big rush to put gobs of money to work right away because there aren't a lot of cheap stocks out there."
After the nearly 30-per-cent gain in the S&P 500 last year, Mr. Tahiliani wouldn't be surprised to see a correction some time in the first half of 2014. To prepare, he's been raising cash and hedging his portfolio with put options on certain stocks and on the S&P 500 index.
Still, McLean & Partners, which manages money for high-net-worth individuals, has a core group of stocks that it plans to hold for the long term and would consider adding to on any price weakness. Most of these "best long-term ideas" are mid-cap and large-cap equities with strong balance sheets and growing free cash flow to fund dividend hikes and share buybacks.
"We look for companies that have an economic moat or sustainable competitive advantage," he says.
Here's a sample of the stocks he likes:
Price: $96.49 (U.S.)
Yield: 2.8 per cent
Three-year annualized dividend growth: 8.7 per cent
As a shipping company, UPS is benefiting from global growth in e-commerce. What's more, the company is generating growing revenue from its contract logistics division, which manages distribution, transportation and supply chain operations on an outsourced basis for a range of clients. Mr. Tahiliani also likes the fact that employees own 23 per cent of the company, which aligns their interests with those of investors. The forward price-to-earnings multiple of 18 isn't cheap, but it's acceptable given the company's solid growth prospects, he says.
Price: $41.04 (Canadian)
Yield: 6.4 per cent
Three-year ann. div. growth:
6.3 per cent
This month, Baytex launched a $1.8-billion bid for Australia's Aurora Oil & Gas, giving the Canadian company exposure to the prolific Eagle Ford light oil play in Texas. Investors will see an immediate benefit: After the deal's expected closing in May, Baytex has pledged to increase its dividend by 9 per cent to 24 cents per month. Mr. Tahiliani likes Baytex's "strong management" and "disciplined" approach to capital allocation, and says the deal reduces the company's heavy-oil exposure to about 53 per cent of production from 75 per cent. That will help if the price differential between heavy oil and more expensive light oil widens in the future, he says.
Price: $11.64
Yield: 2.1 per cent
Three-year ann. div. growth: n/a
After discontinuing its dividend in 2009, Precision Drilling reinstated it in 2012 and raised it by 20 per cent in 2013. The yield is modest, but the provider of contract drilling and well servicing to the oil and gas industry has a strong balance sheet and solid free cash flow generation to fund future dividend increases, he says. Over the next few years, the company has a major opportunity to provide the drilling rigs that will be required by producers planning to ship liquefied natural gas offshore.
Price: $58.49 (U.S.)
Yield: 2.6 per cent
Three-year ann. div. growth:
93 per cent
JPMorgan Chase, the largest U.S. bank by assets, is benefiting from consumer and business loan growth, strong equity markets, increasing mergers and acquisitions activity and rising revenue from underwriting and wealth management, Mr. Tahiliani says. The company slashed its dividend by 87 per cent during the financial crisis but has since raised it three times and the dividend is now back to where it was before the cut. As the U.S. economy grows, expect more dividend hikes, he says.
Price: $66.75 (Canadian)
Yield: 2.9 per cent
Three-year ann. div. growth:
9 per cent
Intact Financial sells home, auto and business insurance through subsidiaries Grey Power, belairdirect, BrokerLink, Jevco and Intact.
Although the company has been hit by an increase in weather-related claims, it has the pricing power to raise premiums and recover losses. The stock price of roughly two times book value isn't cheap, but the company has consistently grown its book value and raised its dividend – including a 9-per-cent hike announced this month.
John Heinzl