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yield hog

When Darren Sissons is searching the globe for promising dividend stocks, yield is just one of the factors he considers.

Among other things, he looks for companies that are leaders in their industry, produce strong free cash flow and have the ability to grow their dividends. A "positive catalyst" – such as a major acquisition – is also a big plus.

If a company ticks off all those boxes, he tries to buy it when it's cheap.

"We typically target companies that are mispriced or discounted to their longer-term intrinsic value," says Mr. Sissons, a partner with Campbell Lee & Ross Investment Management.

Here are five dividend stocks he likes right now.

Be sure to do your own due diligence before investing in any security so that you understand the risks.

Enbridge Inc. (ENB-TSX)

Price: $56.82
Yield: 3.7 per cent

Earlier this month, pipeline operator Enbridge announced the $37-billion acquisition of Houston-based Spectra Energy Corp. – a deal that will create North America's largest energy infrastructure company.

"This deal provides Enbridge with an enhanced dividend growth outlook," Mr. Sissons says. Before acquiring Spectra, Enbridge's guidance was for dividend growth of 10 per cent to 12 per cent annually through 2019. After the merger, Calgary-based Enbridge aims to increase its dividend by 15 per cent in 2017 and by 10 to 12 per cent annually through 2024.

Dividend hikes aren't official until the board approves them, of course, but by extending its dividend growth forecast by several years Enbridge is sending a positive signal, Mr. Sissons says.

Algonquin Power & Utilities Corp. (AQN-TSX)

Price: $11.98
Yield: 4.6 per cent

Algonquin's objective is to increase its dividend by 10 per cent annually, and its $2.4-billion acquisition of Joplin, Mo.-based Empire District Electric Co. should help it accomplish that goal, Mr. Sissons says. The deal – expected to close in the first quarter of 2017 – "will be accretive to earnings and cash flow immediately and will provide longer-term growth and support for future dividend hikes," he says.

Complementing its growing utility operations, Oakville, Ont.-based Algonquin's renewable generation portfolio – including wind, solar and hydro – has a strong development pipeline and is expected to more than double its EBITDA (earnings before interest, taxes, depreciation and amortization) to about $410-million by 2020, the company says.

H&R REIT (HR.UN-TSX)

Price: $22.46
Yield: 6 per cent

Real estate investment trusts "are benefiting from a 'lower for longer' stance by the Bank of Canada with respect to interest rate hikes," Mr. Sissons says. H&R, the second-largest REIT in Canada, owns more than 500 retail, industrial and office properties – including The Bow in Calgary, Corus Quay in Toronto and Place Bell in Ottawa. H&R's average lease term is 9.9 years – one of the longest in the industry, according to the company – and its occupancy has been more than 95 per cent since 1997. H&R's unit price has been hurt by its exposure to Alberta and by the departure of Target from Canada, but it has "now leased most of the Target space." The units are up about 11 per cent in 2016 but still trade at a discount to their net asset value, Mr. Sissons says.

Royal Dutch Shell PLC (RDS.B-NYSE)

Price: $50.06 (U.S.)
Yield: 7.5 per cent

Royal Dutch Shell's lofty yield might be a red flag for some investors, but the company's divestiture program and improving balance sheet "suggest the dividend and its current yield are sustainable," Mr. Sissons says. Having dropped about 40 per cent from its 2014 peak, the stock is "inexpensive by virtually all valuation metrics," he adds. Faced with low oil prices, the Anglo-Dutch multinational energy giant has cut costs, sold off non-core assets and improved efficiencies. And the acquisition earlier this year of BG Group PLC (British Gas) has made Shell into "the clear global leader in liquefied natural gas," Mr. Sissons says. If oil prices were to rise, the company could be in a position to raise its dividend, he says.

Enercare Inc. (ECI-TSX)

Price: $19.04
Yield: 4.9 per cent

Formerly known as Consumers' Waterheater Income Fund, the company changed its name to Enercare when it converted to a corporation in 2011. Since then, it has raised its dividend by 42 per cent – including a 10-per-cent increase announced in May. Enercare provides rental water heaters, furnaces, air conditioners, plumbing services and protection plans to more than 1.2 million customers. It is also installs sub-meters that allow condo and apartment residents to control their own electricity, heating and water costs. "The industry in North America is fragmented and their latest acquisition of Service Experts, a similar although smaller U.S.-based competitor, is expected to be 25-per-cent accretive to 2016 distributable cash flow per share," Mr. Sissons says. That will support the current dividend and help to pave the way for potential for future increases, he says.

Disclosure: the author personally owns shares of ENB and AQN and holds ENB in his Strategy Lab model dividend portfolio. View it online at tgam.ca/divportfolio.

Yield Hog is part of Globe Unlimited's Strategy Lab series. Subscribers can read more at tgam.ca/strategy-lab.