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Toronto-Dominion Bank has been active on the acquisition front, taking advantage of market weakness to grow. (© Mark Blinch / Reuters/REUTERS)
Toronto-Dominion Bank has been active on the acquisition front, taking advantage of market weakness to grow. (© Mark Blinch / Reuters/REUTERS)

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

When Cardinal Capital Management is choosing stocks for the mutual funds, pension funds and individual accounts it manages, it’s as concerned about safety as it is about generating solid returns.

Perhaps not surprisingly, it gravitates to conservative, large-cap stocks that pay growing dividends.

“Dividend investing is one of the proven strategies over time,” says Jim McInnis, vice-president of investments for Winnipeg-based Cardinal, which manages about $1.7-billion. “We’re investing in companies that we think are going to be around for the long-term.”

That means companies with strong balance sheets, good growth prospects, a global presence and some sort of competitive advantage – what Warren Buffett described as a “moat.”

For Canadian companies, Cardinal looks for a minimum market capitalization of $2-billion, while for U.S. stocks the minimum market cap is $7-billion.

Why the focus on large caps?

“We want stocks with liquidity. That’s one driver,” says Evan Mancer, a portfolio manager and also vice-president of investments with Cardinal.

“The other driver is that, being dividend growth investors, we want companies that are predictable. Our past experience has been that the most predictable companies are generally market share leaders or they’re companies, like the Canadian banks, that are in oligopoly-type industries.”

We asked Mr. McInnis and Mr. Mancer to discuss six stocks that meet their criteria.

We’ve included the dividend yield and, where applicable, the five-year annualized dividend growth rate.


Toronto-Dominion Bank (TD-TSX)

Yield: 3.7 per cent

5-yr. div. growth rate: 6.3 per cent

Bank of Nova Scotia (BNS-TSX)

Yield: 3.9 per cent

5-yr. div. growth rate: 4.6 per cent

Both TD and Scotiabank have solid growth prospects, with 35 per cent of TD’s revenue outside of Canada (mainly in the United States) and 50 per cent of Scotiabank’s revenue outside the country (mainly Mexico and South America), Mr. Mancer says. Both banks have been active on the acquisition front, taking advantage of market weakness to grow. And both are expected to hike their dividends when they report first-quarter results – TD by about 6.5 per cent on Feb. 28, and Scotiabank by about 3.5 per cent on March 5, according to Bloomberg estimates.


Cenovus Energy (CVE-TSX)

Yield: 2.7 per cent

5-yr. div. growth rate: n/a

“We think Cenovus is a technology leader in the oil sands … we also think they’ve got one of the best environmental records in the oil sands and they’ve got one of the best records on execution,” Mr. Mancer says. What’s more, the company’s strong cash flow allows it to fund growth while keeping its dividend “absolutely safe,” he says. Cenovus, an integrated oil company that was split off from Encana in 2009, raised its dividend by 10 per cent in 2012 and Bloomberg forecasts another double-digit increase this month.


McDonald’s (MCD-NYSE)

Yield: 3.2 per cent

5-yr. div. growth rate: 13.9 per cent

McDonald’s has raised its dividend every year since 1976, through wars, recessions, currency meltdowns and the U.S. housing collapse. “If it’s able to increase the dividend through what we had in ’08 and ’09, then we certainly think it’s going to be able to increase it through whatever the market throws at us in the next number of years,” Mr. Mancer says. The burger giant has done a great job of refreshing its menu, investing in its stores and expanding in emerging markets, and the stock is reasonably priced, he says.


Microsoft (MSFT-Nasdaq)

Yield: 3.3 per cent

5-yr. div. growth rate: 15.2 per cent

“The media focus a lot on the consumer market and less so on the strength of the business/enterprise market, which is growing and contributes to a steady recurring revenue stream,” Mr. McInnis says. Microsoft has a bulletproof balance sheet, strong free cash flow and it rewards shareholders with share buybacks and rising dividends. Yet it trades at just 8.8 times estimated fiscal 2014 earnings. “We believe the market has beaten down this name,” he says. “The valuation multiple has contracted for many years while profits have increased. We see little downside at this time and healthy upside for patient investors,” he says.


H.J. Heinz (HNZ-NYSE)

Yield: 3.4 per cent

5-yr. div. growth rate: 6.3 per cent

Most people associate Heinz with ketchup. But the company is a global food giant whose products also include Classico, Ore-Ida, SmartOnes and other foreign brands you’ve probably never heard of. Heinz’s global growth potential is a big reason to like the stock: Emerging markets account for about 25 per cent of Heinz’s sales and half of its sales growth over the past six years, Mr. Mancer says. The company has hiked its dividend annually for many years; the next increase is expected in May.


The author personally owns shares in TD, Scotiabank and McDonald’s.

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