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What are we looking for?

Canadian dividend stocks that may be a good fit for contrarian investors prowling for out-of-favour companies that deserve to be much more popular.

To accomplish this, we're going to use a model portfolio known as the Contrarian Investor strategy from our friends at Validea Canada. Validea is a premium stock screen service that has a partnership agreement with Globe Investor.

The top 10 stocks of the Contrarian Investor portfolio for U.S. stocks have returned 25.2 per cent over the past 12 months, slightly edging past the S&P 500 return of 24.7 per cent. But it has a strong track record since its inception in July, 2003, returning 7.2 per cent annually versus 5.3 per cent for the benchmark U.S. index, exclusive of dividends. We're going to filter out non-dividend paying companies from our screen to make this relevant for the yield-hungry among us.

More on today's screen

The strategy we're using is based on the book Contrarian Investment Strategies by David Dreman, manager of the former Kemper-Dreman High-Return Equity Fund. It was one of the best-performing mutual funds ever, ranking No. 1 out of 255 funds in its peer groups between 1988 and 1998, according to Lipper Analytical Services. Mr. Dreman isn't just your average contrarian who doesn't want to follow the crowd. He's one of the best at identifying overlooked companies that will eventually outperform the broader market.

The strategy looks for large, fundamentally sound companies that are out of favour – whether that's due to public apathy or naiveté. Stocks that rank highly should have good earnings growth, good return on equity and a low debt-to-equity ratio, but must also have a low price relative to earnings, cash flow, book value or dividends.

What we found

The strategy score for each stock represents what percentage of tests the stock passes and it's weighted based on the importance of each criterion.

Seven of the top 10 Canadian stocks that scored the highest using this filter were dividend payers. None of these firms get a 100 per cent score from the strategy, but this is a rigorous screen to pass and these scores may be high enough to warrant further research by those looking at loading up on some stocks on the cheap.

Given that many of these companies are being shunned by investors because of various problems they may have, it's not terribly surprising to see several paying decent-sized dividends.

But one really stands out: Chorus Aviation Inc., with a yield of 25.2 per cent. Chorus operates Jazz Aviation, which flies regional flights for Air Canada, and saw its share price plunge earlier this month after halving its dividend.

Chorus right now is involved in an ugly litigation case with Air Canada. Canada's largest airline is looking to reduce costs and lower the mark-up rate Chorus charges for its services, which could result in a big financial hit. There are also other concerns for Chorus, too, such as the surge in competition in the regional airline industry.

Contrarian investing is always risky. Remember to use these screens only as the starting ground for further research. (Read more.)

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