Where to look for good dividends at good value

The market has been on steroids since bottoming out in March, but don't despair, dividend investors. You can still find reasonably priced stocks with solid yields and attractive prospects. You just have to know where to look.

To help us in our search, we've enlisted Juliette John, lead manager of the Bissett Dividend Income Fund and Bissett Canadian Dividend Fund. Ms. John looks for companies that offer growth at a reasonable price - GARP for short - and a dividend that increases over time.

"The dividend has to be reasonably high and the company has to be able to maintain that dividend, and preferably grow it," she says. "So we are looking for companies that we believe will be able to exhibit earnings growth."

Here are three sectors she finds especially attractive.

PIPELINES AND UTILITIES

Companies such as Enbridge Inc. (yield: 3.5 per cent), TransCanada Corp. (4.5 per cent) and Canadian Utilities Ltd. (3.6 per cent) are "very good defensive names," Ms. John says. They provide essential services such as oil and gas transmission and electricity generation, and generate predictable earnings.

Just don't expect a quick payoff.

"These are companies that do really, really well over the long term. They may not necessarily have the torque in the short term that a lot of the more economically sensitive sectors and securities do, like the base metals or industrials," she says.

On the plus side, patient investors should be rewarded with growing earnings and rising dividends, she says.

TELECOMS

Shares of BCE Inc., Rogers Communications Inc. and Telus Corp. have been pounded amid fears about new competition in the wireless space, declining land-line subscribers and falling average revenue per user, or ARPU. Concerns about hefty smart phone subsidies borne by wireless companies are also weighing on the stocks.

But Ms. John thinks the selling has been overdone.

The incumbents have strong balance sheets and manageable debt levels, and they've been slashing costs as they prepare for increased competition as early as the fourth quarter. What's more, BCE (yield: 6.3 per cent) and Rogers (4.1 per cent) both raised their dividends this year (BCE did so twice). Telus (5.7 per cent) last raised its dividend in November, 2008.

"People just have not paid any heed to the benefits in the sector," she says. "So I think the concern about new wireless competitors has offered a really good opportunity to buy these stocks at very reasonable valuations."

CANADIAN BANKS

Yes, banks have already posted huge gains. No, it is not too late to buy them - with an important caveat: You have to be prepared to hold them for several years. "If you have a long horizon, I think they're very, very attractive buys," she says.

Having fortified their balance sheets during the financial crisis, banks are well capitalized and their dividends are safe. Some banks may even resume dividend increases in 2010, she says, although concerns about the economy, credit losses, lending volumes and capital markets activity could hold some banks back.

Dividend yields range from a low of 3.5 per cent for Royal Bank of Canada to a high of 5.3 per cent for both Bank of Montreal and Canadian Imperial Bank of Commerce.

OTHER IDEAS

We've included a list of the top 10 holdings for the Bissett Dividend Income Fund and Bissett Canadian Dividend Fund. Keep in mind that some of these stocks have already posted large gains so their inclusion on this list does not necessarily mean they are good buys at current prices.

As always, do your own due diligence before investing in any security.

***

Top 10 holdings

Bissett Dividend

Income Fund

Holding (% weighting)

Royal Bank of Canada (3.8)

Power Financial Corp. (3.32)

TMX Group Inc. (3.31)

BCE Inc. (2.93)

Reitmans (Canada) Ltd. (2.89)

Canadian Utilities Ltd. (2.83)