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yield hog

John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.

With gloom in the oil patch spreading to banks and other sectors, the past few months have frayed the nerves of even seasoned investors.

But Anil Tahiliani says there's an upside.

"You're seeing certain sectors, like financials, getting really beaten up," says the portfolio manager with McLean & Partners Wealth Management. "People have overreacted on some sectors, and there are starting to be opportunities."

Based in Calgary, McLean manages about $1-billion on behalf of high net worth individuals. The company, which focuses on large-cap stocks that pay growing dividends, has been sitting on the sidelines since October, but it's now preparing to put some cash to work.

A growing dividend isn't the only thing Mr. Tahiliani looks for in a stock. He also likes to see:

A consistently high return on equity, which indicates that the business is generating a solid profit on the money shareholders have invested;

A sustainable competitive advantage, or "moat," which can come from a powerful brand name, lower costs, high barriers to entry or other factors;

A strong balance sheet, which enables the company to survive economic downturns and take advantage of acquisition opportunities;

An experienced management team with a track record of creating shareholder value;

An attractive valuation, as measured by a combination of discounted cash flow analysis and ratios including price-to-earnings (P/E) and enterprise value to earnings before interest taxes depreciation and amortization (EV/EBITDA).

Here are five of McLean's current holdings and why Mr. Tahiliani likes them.

TransCanada (TRP-TSX)

Price: $52.96, down 22¢

Yield: 3.6%

TransCanada Corp.'s stock has been caught up in the malaise of all things energy-related. It's also struggled as the Keystone XL pipeline faced one roadblock after another. But there is plenty to like about the company, Mr. Tahiliani says: It has about $13-billion of smaller projects that are likely to go ahead, and it recently pledged to double its dividend growth rate to 8 to 10 per cent annually through 2017, up from less than 5 per cent previously. Another plus is TransCanada's diversification: In addition to pipelines, it owns power generation and natural gas storage assets.

United Parcel Service (UPS-NYSE)

Price: $111.31 (U.S.), up $1.01

Yield: 2.4%

As the world's largest package delivery company, with a fleet of nearly 600 aircraft and 100,000 vehicles, United Parcel Service Inc. is enjoying a powerful tailwind from global growth in e-commerce. It's also benefiting from the recent plunge in oil prices, Mr. Tahiliani says. He likes the fact that employees own about 24 per cent of the company, because it aligns their interests with those of management. "They have a great capital allocation record in terms of buying back shares and increasing their dividend," he says. Over the past three years the dividend has grown at an annualized rate of about 9 per cent, with increases typically announced in February.


Price: $90.99, up 6¢

Yield: 4.5%

Canadian banks have been hammered by fears of a slowing economy, and none has been hit harder than Canadian Imperial Bank of Commerce. But the selling has been overdone, Mr. Tahiliani says: The stock now trades at less than 10 times estimated fiscal 2015 earnings, and the yield is the highest of the Big Five after CIBC hiked its dividend three times in the last 12 months. With strong capital ratios and a solid balance sheet, CIBC may look to bulk up its wealth management business with an acquisition, he says.

Starbucks (SBUX-Nasdaq)

Price: $81.23 (U.S.), up 62¢

Yield: 1.6%

With more than 21,000 stores in 65 countries, Starbucks Corp. has already hooked much of the world on its caffeinated beverages. And it's only going to get bigger, with plans to reach 30,000 stores over the next five years, Mr. Tahiliani says. Having cornered the coffee market – the company earned $2.1-billion (U.S.) on revenue of $16.4-billion in the fiscal year ended Sept. 28 – it now wants to do the same thing with tea. The stock's yield isn't huge, but the dividend has increased at an annualized rate of 25 per cent over the past three years. While the P/E of 26 (based on 2015 estimates) may seem high, it's justified by Starbucks' double-digit growth rate, he says.

MasterCard (MA-NYSE)

Price: $84.26 (U.S.), up 46¢

Yield: 0.8%

MasterCard Inc. isn't a bank and it doesn't take on any credit risk. It's more like a toll booth, collecting a fee for every credit and debit card transaction that it processes.

As the world moves away from cash, the volume of transactions has grown steadily. And there is still plenty of growth ahead, particularly in emerging markets, where about 62 per cent of personal transactions are done in cash, compared with 41 per cent in developed markets, Mr. Tahiliani says. The yield won't make you rich, but the dividend has grown at more than 100 per cent annualized over the past three years. And there's more where that came from.

Final thoughts

All stocks come with risks, so do your own due diligence before investing. Growth-oriented companies, in particular, are vulnerable to selloffs if revenues and profits don't increase as quickly as expected.

Also be mindful of currency risks when investing in U.S. companies; should the Canadian dollar rebound after its recent drop, the value of U.S. stocks would fall when priced in Canadian currency.

Disclosure: The author personally owns TRP and CM, and holds TRP in his Strategy Lab model dividend portfolio.

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