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yield hog

With U.S. interest rates expected to rise, Sun Life stands to benefit from higher earnings.FRED THORNHILL/Reuters

John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.

Norman Levine is a big fan of dividend stocks. Virtually all of the companies his firm invests in pay dividends, and he's especially fond of those that raise their dividends regularly.

But not all dividend stocks pass the sniff test, says the managing director of Portfolio Management Corp. in Toronto.

For instance, he's wary of companies that pay out a very high percentage of their earnings as dividends as they may not be reinvesting enough cash in their business to grow. He also generally avoids companies with yields that are well above average.

"While many investors … are attracted to high-yielding stocks, for us they are flashing a big warning sign as high yields generally indicate poor fundamentals and a dividend that might be in jeopardy," Mr. Levine says.

In addition to a sustainable and growing dividend, Mr. Levine – whose firm manages about $550-million on behalf of high-net-worth individuals and families – looks for companies with low debt levels, strong cash-flow generation and management with a solid track record.

As a value investor with a long-term focus, he often tries to buy the stocks when they are out of favour and trading at attractive valuations.

Here's a sample of the stocks his firm owns. Be sure to do your own due diligence before investing in any security.

Stantec Inc. (STN-TSX)

Price: $30.22

Yield: 1.49 per cent

Stantec's yield may be modest, but the dividend has been growing at an annual pace of more than 10 per cent since it was initiated in 2012 – even as the stock has gone sideways for the past few years.

"Stantec is an engineering and design company that we bought to benefit from the expected surge in provincial and federal government infrastructure spending as well as the ongoing recovery in commodity prices," Mr. Levine says. The Edmonton-based company has been growing organically and through acquisitions such as the recent purchase of MWH Global, a U.S.-based engineering and construction firm with expertise in water and natural resources projects.

Sun Life Financial Inc. (SLF-TSX)

Price: $44.58

Yield: 3.63 per cent

Low bond yields are like kryptonite to insurers that invest most of their premiums in fixed-income securities. But with U.S. interest rates expected to rise, Sun Life stands to benefit from higher earnings, Mr. Levine says. What's more, the company's U.S.-based MFS Investment Management division is becoming an increasingly important source of growth and income, he says.

"After a long hiatus of not raising its dividend since the financial crisis, Sun Life raised it twice in 2015 and so far once in 2016. We expect a further increase for the fourth quarter and additional increases in 2017 as earnings continue to grow."

Morneau Shepell Inc. (MSI-TSX)

Price: $19.93

Yield: 3.91 per cent

Morneau Shepell, which provides human-resources consulting and outsourcing services, is something of a show-me story for dividend-growth investors. "While the dividend has not been raised in the past five years, we expect that situation to change in the next 12 months as the company's payout ratio approaches 65 per cent, which is at the absolute low end of its stated payout ratio," Mr. Levine says.

"Once they do raise the dividend, we expect they will continue to raise it on a regular basis as earnings increase." In the meantime investors get paid to wait with an attractive 3.91-per-cent yield.

MetLife Inc. (MET-NYSE)

Price: $46.79 (U.S.)

Yield: 3.42 per cent

MetLife, which provides insurance, annuities and employee-benefits programs, recently unveiled plans to spin out most of its U.S. retail life insurance business into a separate company called Brighthouse Financial.

The unit has been an uneven performer and the move – combined with a $1-billion (U.S.) cost-cutting program – will result in "a more focused company with a higher return on equity and increased cash available for share buybacks and dividend increases," Mr. Levine says.

Metlife has raised its dividend every year since 2013 – at an annualized rate of 13 per cent – "and we see the growth rate for dividends increasing following the spin-out."

Sanofi SA (SNY-NYSE)

Price: $39.03 (U.S.)

Yield: 4.26 per cent

Many of Sanofi's major drugs have come off patent in recent years and its immediate product pipeline is "pretty bare," Mr. Levine says.

Those factors have contributed to a roughly 30-per-cent decline in the stock price since September, 2014, and the shares now trade at about 13 times estimated 2017 earnings.

Yet, the company has raised its dividend for 22 consecutive years and he expects the increases to continue.

"Historically, this is the best time to buy drug stocks to make a lot of money, when nobody wants them," he says.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 27/03/24 4:00pm EDT.

SymbolName% changeLast
STN-T
Stantec Inc
-0.63%113.73
SLF-T
Sun Life Financial Inc
+0.05%73.8
MET-N
Metlife Inc
+1.18%73.92

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