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Dividends and a dollop of growth: Mix well

What are we looking for?

Dividends, for starters. A strong dose of safety, too. Plus a dash of growth potential.

To be more precise, we're using a methodology developed by Michael Bowman and Allan Meyer, portfolio managers at Wickham Investment Counsel of Hamilton, to hunt for a diversified portfolio of Canadian dividend stocks that have the capacity to expand their payouts.

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The logic here is that dividend-paying stocks have shown a strong tendency to produce better total returns than the overall market over time. Spreading our bets across many sectors reduces the risk of getting sideswiped by any one economic mishap. And insisting on the capacity for growth means that our dividends will be able to increase over time.

More about today's screen

Our search spanned 706 Canadian stocks with market capitalizations of more than $200-million each. The goal was to select the best stocks across various industry sectors based on dividend yields and growth potential. Safety also played a factor. We wanted to find stocks with relatively stable earnings and relatively low payout ratios – in other words, companies that have reliable profits big enough to comfortably cover their dividend payments.

The screen incorporates eight criteria: dividend yield, five-year dividend growth, payout ratio, five-year earnings-per-share growth rates, earnings variability, projected dividend growth, annual dividend momentum and quarterly dividend momentum.

What did we find?

Stocks spanning all major sectors of the economy, ranging from household names such as BCE and Canadian National Railway to lesser known enterprises such as Computer Modelling Group and Evertz Technologies. Taken as a group, this portfolio delivered a yield of 3.18 per cent at time of screening.

Mr. Bowman says the screen's methodology returned 10.5 per cent over the past 12 months while outperforming the TSX by 16.3 percentage points. The portfolio does not require frequent trading, but it does require monitoring. Significant cuts in analysts' earnings estimates for a firm, or a big earnings disappointment, will result in a stock getting the boot.

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As always, investors should do their research before buying any of the stocks listed here. But the core philosophy of this portfolio – looking for reliable dividend payers and diversifying across many sectors – is attractive, especially at a time such as now, when bonds and savings account are producing miserly yields.

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