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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.

Side of growth with your dividends?

With interest rates expected to climb, investors shouldn't try to live on yield alone. To mitigate the impact of rising rates, it's important to find companies whose earnings – and dividends – are expected to grow.

"Obviously, rates will be going up," says John Stephenson, portfolio manager with First Asset Investment Management and author of The Little Book of Commodity Investing and Shell Shocked: How Canadians Can Invest After the Collapse. "Given that we're getting into a higher rate environment, it's not enough for companies to have a decent dividend. They have to have growth."

When choosing stocks, he also looks for a strong balance sheet, which helps him steer clear of companies that will need to issue a lot of debt or equity. "The market in general is not all that receptive. Anyone who is in need of a financing is something we're looking to avoid," he says.

Finally, he looks for companies with a manageable dividend payout ratio. This minimizes the chances of a dividend cut and increases the likelihood of a dividend increase.

Yield Hog asked Mr. Stephenson to discuss five of his dividend favourites.

Inter Pipeline

  • IPL; Oct 8 close: $24.50
  • Yield: 5.3 per cent

The key to Inter Pipeline's future is growing volumes from the oil sands, Mr. Stephenson says. The company – whose operations include pipelines, petroleum storage and natural gas liquids extraction – has hiked its dividend three times in the past year, and he expects the dividend to continue growing by 10 per cent annually for the next couple of years at least. There's also a good chance Inter Pipeline will be added to the MSCI Canada Index in the November rebalancing, he says, which would create demand from index funds that will need to buy the shares.

Toronto-Dominion Bank

  • TD; Oct 8 close $91.01
  • Yield: 3.7 per cent

With more than 25 per cent of revenues coming from the U.S. market, TD is levered to growth in the world's biggest economy, where the housing market is on the mend and household debt has come down sharply. In Canada, TD will benefit from a deal with CIBC and Aimia to take over part of the Aeroplan Visa loyalty card business, which will add about 10 cents in earnings per share in 2014. TD's dividend yield and payout ratio are below the average of the Big Five, yet the company is growing faster than the group. As a result, Mr. Stephenson expects the bank will continue its recent pattern of raising its dividend twice a year.

Boardwalk REIT

  • BEI.UN; Oct. 8 close $55.86
  • Yield: 3.5 per cent

Boardwalk's yield isn't huge, particularly for a real estate investment trust, but the apartment owner has a strong balance sheet, relatively low payout ratio and good growth prospects in its home market of Alberta – all of which suggest it will continue raising its distribution. Apartment REITs also have an advantage over office or retail REITs in that rents can usually be increased annually instead of being locked in for five-year terms, he says.

Crescent Point Energy

  • CPG; Oct 8 close $38.06
  • Yield: 7.3 per cent

Crescent Point's production has surged to more than 114,000 barrels of oil equivalent per day from about 1,000 in 2003. But the growth has come at a price: The stock's been in the penalty box because investors have been concerned about dilution from multiple equity issues. However, management has responded to those concerns by slowing the pace of acquisitions to concentrate on harvesting its existing assets, Mr. Stephenson says. The yield is high but the dividend is "very sustainable," he says.


  • L; Oct. 8 close $45.10
  • Yield: 2.1 per cent

Loblaw went for more than seven years without a dividend increase while it battled inventory management problems and growing competition from Wal-Mart. However, Canada's largest grocer has raised its divvy twice in the last year – a sign that the company has turned the corner. The pending acquisition of Shoppers Drug Mart is a big win, because it allows both chains to cross-sell products and will generate about $300-million in cost savings over three years, Mr. Stephenson says.

John Heinzl personally owns shares of Inter Pipeline and TD.