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Mr. Bowman is a portfolio manager at Hamilton-based Wickham Investment Counsel Inc., an adviser to high net worth clients. michael@wickhaminvestments.com
What are we looking for?
While stocks that pay dividends have outperformed the broad market, stocks with growing dividends have provided even better returns over time. A company that can increase the dividend must have a business that can grow its free cash flow, and a management team and culture focused on providing shareholder value. Today, my colleague Rob Belanger and I look at North American companies that have a history of raising their dividends.
The screen
We screened for companies with a market capitalization of more than $1-billion and a dividend yield of 3 per cent or more. Since the yield on a 10-year Canada bond is now 2.53 per cent, we figured a yield of this size is needed to compensate investors for the added risk of owning equities.
To make our list, a company had to have increased its dividend each year for the past five years. Also, earnings per share had to have increased an average of 5 per cent or more annually for the past five years.
The price-earnings ratio is the earnings estimate for the next 12 months divided by the current share price. We favour a low number.
The 30-day relative strength index (RSI) is a momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine "oversold" and "overbought" conditions. The RSI ranges from 0 to 100. A stock is deemed to be "overbought" as its RSI approaches 70, indicating the stock may be due for a pullback. On the contrary, if the RSI approaches 30, the asset may be "oversold" and due to rise.
The return on equity (ROE) measures a firm's profitability by revealing how much profit it can generate with the cash shareholders have invested. Those showing a high ROE are more profitable, and we have only listed companies with an ROE of 15 per cent or more.
What did we find?
Only two corporations score better than the averages in ROE, EPS growth and P/E. Newmarket Corp. is a holding company in the petroleum additives industry, and Alliance Resources is a producer and marketer of coal to major U.S. utilities and industrial users.
On a P/E basis, the most overvalued, and one of the most overbought, is aerospace company Heico Corp.
Noteworthy is the fact that only three Canadian companies make our list: Rogers Communications Inc., Telus Corp. and Emera Inc. They are also the most oversold stocks.
As always, investors should do further research, or contact an investment professional, before buying.