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Three Canadian stocks that tick all the right boxes for dividend growth and juicy yields

One of my favourite investing books is The Single Best Investment: Creating Wealth with Dividend Growth, by U.S. money manager Lowell Miller.

In a fast-paced world of hedge funds, momentum stocks and exotic exchange-traded funds, the book stands out for its sensible approach to investing. As Mr. Miller explains it, "the Single Best Investment approach relies on a simple formula, so simple it almost seems impossibly simple: High quality + high current dividend + high growth of dividend = high total returns."

With that formula in mind, today we'll look at three solid Canadian companies that offer above-average yields and good prospects for dividend growth. I own all three of these stocks personally and also hold them in my model Yield Hog Dividend Growth Portfolio.

Remember to do your own due diligence before investing in any security, and be sure to maintain a well-diversified portfolio. There's no such thing as a sure thing with investing, but high-quality dividend growth stocks can tilt the risk-reward balance in your favour.

BCE Inc. (BCE)

Tuesday closing price: $61.67
Yield: 4.7%

Fed up with high cellphone bills? Don't get mad, get even by owning shares of BCE.

It offers the highest yield of the Big Three telecom providers, but still provides plenty of growth. In the third quarter, BCE added a net 117,182 postpaid wireless subscribers – beating analyst estimates of 112,000. Its wire-line division also turned in a solid performance, adding a net 44,424 internet customers and 1,738 TV subscribers, helped by the rollout of fibre-to-the-home and the launch of streaming service Alt TV. The ongoing decline of landline phone connections continues to weigh on BCE – 84,762 customers cut the cord in the third quarter – but the losses were not as bad as expected.

Following the results, analyst Maher Yaghi of Desjardins Capital Markets boosted his free cash flow forecast to $3.94 a share for 2017, from $3.85 previously, and $4.07 a share for 2018, from $3.99. (BCE's most recent annual cash flow figure was $3.71 in 2016.) BCE has raised its dividend at a compound annual rate of 4.8 per cent over the past five years and "we view the current dividend growth model as sustainable given underlying trends," Mr. Yaghi said in a note, in which he reiterated his "buy" rating and increased his 12-month target price to $66 from $65.

Algonquin Power & Utilities Corp. (AQN)

Price: $14.11
Yield: 4.3%

Shares of Algonquin Power & Utilities tumbled as much as 5.5 per cent on Nov. 2, a day after it announced a $576-million equity issue – at a discount to the market price – to finance the purchase of a 25-per-cent stake in Atlantica Yield PLC from Spain's Abengoa SA.

But the drop would have been a great buying opportunity: The shares have since recouped all of their losses, and then some, as analysts and investors have warmed to the deal.

Algonquin's renewable power and utility portfolio has until now been confined to North America, but the purchase of a stake in Atlantica gives it exposure to contracted solar and wind facilities, transmission lines and desalinization plants in Europe, South America and Africa.

What's more, Algonquin announced a joint venture with Abengoa that provides an international pipeline of development projects to further augment the Canadian company's growth. Algonquin's global push, combined with last year's $3.4-billion acquisition of Empire District Electric Co. of Joplin, Mo., should help the company continue to deliver on its targeted annual dividend growth rate of 10 per cent.

Algonquin is a favourite of analysts, who have eight buy ratings, two holds and no sells, with a median price target of $16, according to Thomson Reuters.

Emera Inc. (EMA)

Price: $47.87
Yield: 4.7%

Emera's stock skidded earlier this month after the company posted weaker-than-expected third-quarter results, but investors who remain focused on the long term should be rewarded nicely. The utility operator is well-diversified geographically, with about 2.5 million customers in Atlantic Canada, the United States and the Caribbean. Further enhancing its stability, it derives more than 95 per cent of its earnings from regulated operations. The company is also growing steadily, driven by acquisitions such as the 2016 purchase of Tampa-based TECO Energy Inc. and a $7.5-billion capital investment plan that includes the Maritime Link undersea transmission line from Newfoundland and Labrador to Nova Scotia, large-scale solar developments in Florida and upgrades of Nova Scotia Power's transmission and distribution systems. All of this should help Emera achieve its stated 8-per-cent annual dividend growth objective through 2020. Raymond James analyst David Quezada, who has a "market perform" rating and $51.50 target price on the shares, said higher interest rates could pressure utilities in the near- to medium-term, but "from a longer term perspective we see much to like in Emera."

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