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Mr. Bowman is a portfolio manager at Hamilton-based Wickham Investment Counsel Inc., an adviser to high net worth clients. michael@wickhaminvestments.com

What are we looking for?

While stocks that pay dividends have outperformed the broad market, stocks with growing dividends have provided even better returns over time. A company that can increase the dividend must have a business that can grow its free cash flow, and a management team and culture focused on providing shareholder value. Today, my colleague Rob Belanger and I look at North American companies that have a history of raising their dividends.

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The screen

We screened for companies with a market capitalization of more than $1-billion and a dividend yield of 3 per cent or more. Since the yield on a 10-year Canada bond is now 2.53 per cent, we figured a yield of this size is needed to compensate investors for the added risk of owning equities.

To make our list, a company had to have increased its dividend each year for the past five years. Also, earnings per share had to have increased an average of 5 per cent or more annually for the past five years.

The price-earnings ratio is the earnings estimate for the next 12 months divided by the current share price. We favour a low number.

The 30-day relative strength index (RSI) is a momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine "oversold" and "overbought" conditions. The RSI ranges from 0 to 100. A stock is deemed to be "overbought" as its RSI approaches 70, indicating the stock may be due for a pullback. On the contrary, if the RSI approaches 30, the asset may be "oversold" and due to rise.

The return on equity (ROE) measures a firm's profitability by revealing how much profit it can generate with the cash shareholders have invested. Those showing a high ROE are more profitable, and we have only listed companies with an ROE of 15 per cent or more.

What did we find?

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Only two corporations score better than the averages in ROE, EPS growth and P/E. Newmarket Corp. is a holding company in the petroleum additives industry, and Alliance Resources is a producer and marketer of coal to major U.S. utilities and industrial users.

On a P/E basis, the most overvalued, and one of the most overbought, is aerospace company Heico Corp.

Noteworthy is the fact that only three Canadian companies make our list: Rogers Communications Inc., Telus Corp. and Emera Inc. They are also the most oversold stocks.

As always, investors should do further research, or contact an investment professional, before buying.

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