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What are we looking for?

How Canadian dividend and income equity funds performed in the past year.

The screen

We looked for the top 15 performers in the category for one year to Jan. 31. U.S. dollar, segregated and duplicate versions of funds were excluded. We also left out funds with minimum investments of more than $25,000 and those catering to professional groups.

What did we find?

If outperformance is the name of the game, betting on Canadian banks is no way to the top.

Financial service companies such as lenders and life insurers are solid dividend payers, but Cecilia Mo, portfolio manager of the Dynamic Dividend Advantage Fund, avoids investing heavily in these stocks. That's because these companies don't often outperform the index, and many competing funds invest heavily in them. The Dynamic fund was the top performer in the screen, gaining 22.1 per cent in the year.

"The Canadian index is shallow – there are a few sectors that dominate our capital markets," Ms. Mo said. "I'm very focused on stock-picking and looking for companies with unique growth [opportunities]." Ms. Mo has a similar reluctance investing in Enbridge, which she says is followed closely and fairly valued.

Instead, Ms. Mo is looking for companies that still have compelling valuations – ones that can grow their dividends faster than the rest of the market, but still trade below market multiples. To identify these companies she looks for low payout ratios, strong balance sheets and earnings growth opportunities ahead of them.

Investments in architecture and design firm Stantec Inc. and real estate service company FirstService Corp. are two investments she made last year that exemplified this strategy.

Ms. Mo attributes some of her recent success to quickly reducing her investments in real estate investment trusts and utilities in the beginning of 2013 before their selloff. The space was getting too expensive by the beginning of 2013, and she thought interest rates had hit their lowest point.

The fund's investment strategy has shifted toward stock-picking and away from trying to ride larger trends in different sectors. "For 2014, I think the investment theme is less about macro and more about company specific," she said. "If you do your homework to understand each company … I think that will give you the stock performance."

No sector is off limits now. In fact, Ms. Mo is reconsidering REITs, where she is starting to see some attractive multiples. She invested in RioCan REIT late last year for that reason.

Editor's note:

An earlier version of this table incorrectly omitted the Sentry Canadian Income fund from the Canadian dividend and income equity chart. In fact, the fund should have placed fourteenth on the list.

Top 15 Canadian Dividend and Income Equity funds

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