April has been a rough month for investors, with the S&P/TSX composite index tumbling 2.1 per cent.
But Renato Anzovino, manager of the Heward Canadian Dividend Growth Fund, isn't complaining.
"I'm one of those weird people that likes it when the markets go down," Mr. Anzovino says. "I always keep a little cash on the side and wait for these [buying] opportunities."
That approach has worked out well for the vice-president and portfolio manager with Montreal-based Heward Investment Management. For the three years ended March 31, his fund posted a compound annual return of 10.5 per cent, before management fees, compared with about 4.9 per cent for the S&P/TSX Total Return Index.
Heward Canadian Dividend Growth posts returns before fees because it's a pooled fund – essentially a private mutual fund – available to clients who invest a minimum of $150,000 or otherwise qualify as "accredited investors." The management fee ranges from 1 to 2 per cent, depending on the amount invested and whether the fund was purchased directly or through an adviser, he says.
Keep that in mind if you're comparing its returns with regular mutual funds, which report performance after fees.
Another important distinction is the fund's size. With about $27-million in assets under management, it's tiny relative to the big dividend mutual funds and exchange-traded funds that have hundreds of millions, or billions, in assets.
According to Mr. Anzovino, that's an advantage because he can look for stocks that might fly under the radar of the big players. While the fund holds many of the usual dividend suspects – big banks, pipelines and telecoms, for example – he also sees a lot of opportunity in mid-capitalization companies.
When choosing stocks, he looks for minimal debt, predictable earnings, an easily understandable business, a history of dividend increases and growing cash flow to support future dividend hikes. He's less concerned with the initial yield than with the dividend's growth potential.
Here are six dividend stocks among his current holdings that he considers "hidden gems." Remember to do your own due diligence before investing in any company.
Yield: 2.4 per cent
3-yr. div. growth: 14.5 per cent
Edmonton-based Canadian Western Bank trades at a similar valuation to the Big Five, but it has better growth potential thanks to its presence in the four western provinces, he says. Despite strong dividend growth, the payout ratio is conservative. The stock is well off its February peak, and "now that it's getting to the lower end of its valuation range I have been adding to this position," he says.
Yield: 3.1 per cent
3-yr. div. growth: 147 per cent
Founded in 1995, Toronto-based Constellation provides software and services to thousands of customers – both commercial and government – in more than 30 countries. "This is more of an acquisition story. They buy a lot of small mom-and-pop software companies and … make them a lot more efficient," he says. Earnings and dividends have been growing rapidly and there's more to come, he says.
Yield: 2.8 per cent
3-yr. div. growth: 8 per cent
Intact sells home, auto and business insurance through its Intact, belairdirect, Grey Power, BrokerLink and Jevco subsidiaries. At less than 10 times next year's estimated earnings, the valuation is reasonable for a company that has good growth potential, he says.
Yield: 1.5 per cent
3-yr. div. growth: n/a
After initiating a dividend in 2012, the engineering, architecture and environmental sciences firm raised it by 10 per cent in February. Stantec has exposure to the recovering U.S. housing market, and its environmental services division is growing quickly, he says. "The stock is at the higher end of its valuation range so I wouldn't be rushing to buy it today. But with this market you might get a little selloff and then I would definitely consider adding to my position," he says.
Yield: 1.9 per cent
3-yr. div. growth: n/a
As a leader in information technology, aerospace and satellites, MDA stands to capitalize on huge growth in global communications, says Mr. Anzovino, who also likes the stable revenue from its service contracts. The company initiated a dividend in 2011 and raised it by 30 per cent in 2012, and he expects another double-digit increase in the next year or "I'll be making a few phone calls."
Yield: 2.5 per cent
3-yr. div. growth: 9.1 per cent
TransForce owns a portfolio of trucking, package delivery, logistics, waste management and energy services companies. The courier division – whose operating companies include Loomis, ICS and Canpar – is TransForce's fastest-growing business and is benefiting from e-commerce growth. "When you buy something online, you have to get it delivered." With a forward price-to-earnings multiple of less than 10, the stock recently pulled back and is "starting to create a nice buying opportunity."