Some dividend investors salivate over stocks with outsized yields. Not Renato Anzovino.
The lead manager of the Heward Canadian Dividend Growth Fund is more than happy to accept a modest initial yield if the company's earnings and dividends are growing steadily.
Focusing on stocks with rising dividends is a strategy that works in all sorts of market conditions, Mr. Anzovino says. "Investing in these types of growing, high-quality Canadian equities that have a history of paying consistently increasing dividends will continue to provide excellent risk-adjusted returns for investors," he says.
The Heward Canadian Dividend Growth Fund's performance bears that out. The pooled fund – essentially a private mutual fund available to accredited investors and those with a minimum of $150,000 to invest – has posted an annualized total portfolio return of 11.3 per cent over the past five years. That compares with an annualized total return of about 8.2 per cent for the S&P/TSX composite index.
In addition to a growing dividend, Mr. Anzovino looks for companies with predictable earnings, an easy-to-understand business, low debt levels, growing free cash flow and a management team with a solid track record.
Here are five of his favourites right now. Treat this list as a starting point for further research, and remember to do your own due diligence before investing in any security.
Intact Financial Corp. (IFC-TSX)
Dividend yield: 2.4 per cent
Intact Financial is Canada's largest provider of property and casualty insurance, with operating subsidiaries including Intact Insurance, belairdirect, BrokerLink and Jevco. "Its acquisition growth strategy has enabled the company to continually capture market share, streamline costs and drive higher profitability," Mr. Anzovino says. Steadily growing earnings, in turn, have enabled Intact to raise its dividend at a compound annual rate of 9.4 per cent over the past five years. Dividend hikes send a strong signal of confidence about the future, and given the fragmented nature of the industry, there will be plenty of acquisition opportunities ahead, he says.
Aecon Group Inc. (ARE-TSX)
Dividend yield: 2.8 per cent
The largest publicly traded construction company in Canada, Aecon is active in the infrastructure, energy and mining sectors. The shares skidded last fall when third-quarter earnings missed estimates, but Mr. Anzovino says the sell-off was "overdone considering the long-term outlook and strong fundamentals backing the company." With a $4.6-billion backlog of projects (as per the company's December investor presentation), Aecon has plenty of work ahead, and recovering oil prices and higher infrastructure spending will drive more growth in the future, he says. That should keep the dividend – which has more than doubled over the past five years – on an upward trend.
MacDonald Dettwiler and Associates Ltd. (MDA-TSX)
Dividend yield: 2 per cent
MacDonald Dettwiler produces satellites and high-tech information systems for the communications, surveillance and intelligence sectors. After going virtually straight up for years, the shares plunged back to Earth in 2015 and 2016 – in part because of softening demand for commercial communications satellites. The dividend has also been stuck in a holding pattern since 2015. However, the company produces strong cash flow and has a solid balance sheet, Mr. Anzovino says. Trading at a multiple of a little more than 12 times estimated 2017 earnings, the stock "is in our buy range as we see it undervalued considering its long-term growth prospects," he says.
Evertz Technologies Ltd. (ET-TSX)
Dividend yield: 4.2 per cent
Evertz designs and manufactures video and audio infrastructure technologies used in the television, telecommunications and digital-media industries. Content creation and distribution are evolving rapidly, forcing companies to stay on top of the latest technological trends and boosting demand for Evertz's high-tech solutions. "Evertz generates strong free cash flows, has net cash on the balance sheet, high internal stock ownership and grows its dividend regularly," Mr. Anzovino says. What's more, the company also occasionally kicks out a special dividend – including a payment of $1.10 a share in December.
Tricon Capital Group Inc. (TCN-TSX)
Dividend yield: 2.7 per cent
Tricon is a residential real estate investor and asset manager whose $3.8-billion North American portfolio includes single-family rental homes, luxury apartments, manufactured housing communities and investments in land and home building. "We are very positive on the housing rental business in North America due to demographic trends such as immigration in Canada and millennials postponing their home purchase decisions," Mr. Anzovino says.
Unlike real estate investment trusts, which pay out most of their cash flow as distributions, Tricon has a relatively low payout ratio and is more focused on growth. The company raised its dividend by 8.3 per cent in 2016 – the first increase since the company went public in 2010 – and he believes the dividend will continue to grow.