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Four of Canada’s brightest investors go head to head
in a battle for portfolio supremacy

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Russel Metals’ management has a proven ability to make profitable acquisitions. (Glenn Lowson For The Globe and Mail)
Russel Metals’ management has a proven ability to make profitable acquisitions. (Glenn Lowson For The Globe and Mail)

Strategy Lab

Dividend stocks expensive? Not according to this fund manager Add to ...

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

Surveying the dividend stock landscape, it’s easy for investors to conclude that they’ve missed out. After all, many pipelines, utilities and telecoms have been on a tear recently, making the stocks looks expensive.

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But Ryan Crowther, co-lead manager of the Bissett Canadian Dividend Fund and Bissett Dividend Income Fund, says a price chart alone doesn’t tell the full story. To properly value a stock, investors need to look at the price in relation to the cash flow the company will generate well into the future.

On that basis, “we’re finding great companies that are still trading at decent valuations,” Mr. Crowther says.

“And in some cases we’re actually finding companies trading at really attractive valuations, even in the dividend space.”

When choosing stocks for his funds, he and his colleagues employ a bottom-up approach to identify companies that can deliver an attractive total return from both dividends and capital gains.

“We like dividends, but growth is very important to us. It’s a huge part of what we’re looking for,” he says.

Yield Hog asked Mr. Crowther to discuss five of his dividend favourites.

All have comfortable payout ratios (dividends as a percentage of estimated 2013 earnings) and, with one exception, solid five-year annualized dividend growth rates.

Enbridge Inc. (ENB-TSX)

  • Yield: 2.9 per cent
  • Payout ratio: 69.1 per cent
  • 5-yr. annualized dividend growth: 12.9 per cent

Enbridge is one of those stocks that, based on its ever-rising chart, always seems pricey. But given the pipeline company’s robust growth outlook, “it’s not an expensive stock,” Mr. Crowther says. Indeed, Enbridge has about $30-billion of “secured” and “highly certain” projects on the way, and is projecting double-digit growth in earnings and dividends annually for the next five years. Although it faces political risks – notably with the proposed Northern Gateway pipeline – the stock is still attractive even if some projects don’t go ahead, he says.

TransCanada Corp. (TRP-TSX)

  • Yield: 3.6 per cent
  • Payout ratio: 67.4 per cent
  • 5-yr. annualized dividend growth: 5.3 per cent

Like its fellow pipeline operator, TransCanada has plenty of growth ahead, including plans for two pipelines that will ship natural gas to the West Coast for export to Asia. It’s also building power plants, gas pipelines in Mexico and hoping to get the green light for its Keystone XL pipeline that would ship Alberta oil-sands crude to Gulf Coast refineries. The forward price-to-earnings multiple of 20.6 may seem high, but if you consider TransCanada’s longer-term earnings outlook, the stock offers good value, he says.

Russel Metals Inc. (RUS-TSX)

  • Yield: 4.8 per cent
  • Payout ratio: 62.1 per cent
  • 5-yr. annualized dividend growth: -5.1 per cent

Russel Metals slashed its dividend during the financial crisis of 2009, but since then the metals processor and distributor has raised it three times. With a payout ratio of about 62.1 per cent, the company should have no trouble maintaining the dividend, if not raising it, Mr. Crowther says. Russell doesn’t have a lot of organic growth, but management is strong and has demonstrated an ability to make profitable acquisitions. And while the steel business is cyclical, Russel has a conservative balance sheet and modest capital needs, allowing it to generate plenty of free cash flow, he says.

Rogers Communications Inc. (RCI.B-TSX)

  • Yield: 3.4 per cent
  • Payout ratio: 46.3 per cent
  • 5-yr. annualized dividend growth: 30.6 per cent

Mr. Crowther, whose funds also own Telus and BCE, likes Rogers because its low payout ratio gives it flexibility with its free cash flow. The company has been buying back its own shares in recent years, which in hindsight was wise given how the price has climbed. Rogers is benefiting from rising wireless data revenue and cost-cutting measures, and it’s expected to increase its dividend in February. “Whether you’re looking at Rogers or BCE or Telus, these are all businesses that are generating a ton of free cash flow … that can drive dividend growth,” he says.

Canadian Utilities Ltd. (CU-TSX)

  • Yield: 2.6 per cent
  • Payout ratio: 45.1 per cent
  • 5-yr. annualized dividend growth: 7.2 per cent

Canadian Utilities is another stock whose price has run up, but which still offers decent value based on its strong growth profile, he says. What’s more, because a majority of its assets are regulated utilities, the earnings stream is relatively low risk. “The big driver of their growth is in Alberta and it’s on the electricity transmission side,” he says. The yield isn’t huge, but “CU also stands out in the utilities space in that it does have a little bit lower payout ratio than its peers, so there might be a little bit more room there than others to increase that payout ratio.”

The writer owns shares of ENB, TRP and CU.

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