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What are we looking for?

The best Canadian dividend growth stocks.

More about today's screen

CPMS Morningstar, an equity research shop, has a Canadian dividend growth model portfolio that has a total return of 7.1 per cent this year, compared to the S&P/TSX composite total return index of negative 5.3 per cent. Since the end of 1991, the dividend growth portfolio has returned a total of 14.5 per cent, versus the S&P/TSX composite total return index at 8.6 per cent.

Craig McGee, a senior consultant at CPMS, explains that the portfolio favours stocks with high yields, dividend growth, cash flow growth and a high return on equity.

Today, we'll look at the top 10 stocks with market caps above $1-billion that rank highly on these four features. The companies also had to have increased their dividends in the past year, have a five-year annualized dividend growth rate of more than 2 per cent and have a payout ratio on 2012 expected cash flow of less than 50 per cent (expected four quarters of dividends divided by consensus 2012 cash flow estimate).

More about CPMS

CPMS is an equity research and portfolio analysis firm owned by Morningstar Canada. It maintains a database of about 700 of the largest and more liquid Canadian stocks, plus more than 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 did we find out?

Dividend investors will appreciate knowing that favourite yield stocks such as BCE Inc., Telus Corp. and Enbridge Inc. rank highly with this screen, while Pason Systems Inc. and Finning International Inc. might be newer names to the traditional dividend crowd. Almost all the stocks on the list have expected payout ratios of well under 50 per cent for 2012, so if business conditions hold up then more dividend increases should be on the way.

"These types of stocks tend to stand up well during most market cycles and offer investors an increasing income stream with some potential for capital appreciation," Mr. McGee said. "The portfolio should be monitored regularly to watch for decreasing expectations and slowing cash flow since distributions could be cut or suspended if times get tough."