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What are we looking for?

Dividend-paying stocks that appear to be in a good position to raise their payouts.

To identify these firms, we looked for Canadian companies that are paying out a lot in dividends and that have recently hiked their payouts, but still have sufficient earnings and cash flow to further expand their yield.

How we did it

Craig McGee, senior consultant at CPMS Morningstar Canada, filtered the Canadian CPMS database for S&P/TSX composite stocks that met three criteria.

First, the total of each stock's expected regular dividends on common stock for the next four quarters had to be greater than $100-million.

Second, each stock's expected yield had to be greater than 2 per cent.

Finally, the change in expected versus trailing dividends for each stock had to be greater than 1 per cent.

Mr. McGee looked for the 20 companies with the lowest payout ratios based upon both their expected earnings per share (EPS) and their cash flow per share (CFPS). A low payout ratio indicates a firm is dishing out a relatively small amount of its earnings or cash flow as dividends.

He calculated expected dividends by taking the most recently announced dividend and multiplying by the number of payment periods in a year.

More about CPMS

CPMS, a division of Morningstar Canada, provides quantitative North American equity research and portfolio analysis to primarily institutional clients. It covers more than 700 Canadian and 2,200 U.S. stocks, and spends a lot of time adjusting for unusual accounting items in each company's quarterly results to make sure screens can perform correctly.

What we found

The 20 companies listed here would seem to be in a good position to raise dividends. Remember, though, that earnings and cash flow can vary from year to year so payout ratios should be treated only as a guide, not as an inflexible number. Do your own research before buying any of the stocks listed here.