John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.
Greg Newman can think of lots of reasons not to buy stocks right now.
Share prices in general aren't cheap at current levels. Greece is in crisis again. Interest rates have recently risen – and they could move even higher.
But he's buying anyway.
"With the U.S. 10-year bond currently at about 2.4 per cent, stocks that can pay 3 to 4 per cent in dividends and that can grow their earnings and dividends each year are still a good option," says the associate portfolio manager with ScotiaMcLeod.
"So I will continue to add on the dips."
When hunting for dividend stocks, Mr. Newman and his team look at more than just the yield. They focus on companies with the potential for strong earnings and dividend growth, and they try to buy them when the shares are trading at a discount to the true value of the business. Often, they look for a catalyst that will drive the share price higher.
Because safety of dividends is paramount, "we prefer companies with strong and strengthening balance sheets and low … payout ratios," he says.
Here are five of his current holdings. Remember that all stocks come with risks, so be sure to do your own due diligence before investing in any security.
DH Corp. (DH-TSX)
Price: $39.37, down 98¢
Yield: 3.3%
Formerly Davis & Henderson, DH has transformed itself from a cheque printer into a diversified financial services technology company offering a range of lending and payments solutions for banks, credit unions and other clients. The company has grown rapidly through acquisitions, including the recent $1.25-billion (U.S.) purchase of U.S. payment processor Fundtech, and "we believe DH can grow earnings by 9.3 per cent compounded over the next couple of years," Mr. Newman says. With the company focusing on acquisitions, however, the dividend has grown only modestly; the most recent increase, of about 3 per cent, was in 2012.
Manulife Financial Corp. (MFC-TSX)
Price: $23.63, up 20¢
Yield: 2.9%
Manulife Financial has a lot of things going for it, Mr. Newman says. It has a strong capital position. It's diversified geographically, with 45 per cent of earnings coming from the United States and 28 per cent from Asia. And its wealth management operations are growing rapidly, complementing its insurance business. Reflecting the improved outlook, the company – which cut its dividend during the financial crisis – has boosted its payment twice in the past year, including a nearly 10-per-cent dividend increase in May. "Rising interest rates, which eventually should come, will also provide a tailwind," he says. With a majority of Manulife's earnings originating outside Canada, it also stands to benefit from the weak loonie.
Magna International Inc. (MG-TSX)
Price: $71.87, up 23¢
Yield: 1.5%
Magna's shares have doubled in the past two years, but Mr. Newman thinks there are more gains to come given the company's strong balance sheet, robust free cash flow generation and industry-leading position as the largest auto-parts supplier in North America. Margin expansion, share repurchases and acquisitions should drive double-digit earnings growth through 2016, and "we also model that they can grow their dividend at nearly 15 per cent annually over our forecast horizon," he says. The stock trades at a reasonable multiple of about 12.6 times estimated 2016 earnings.
Intact Financial Corp. (IFC-TSX)
Price: $88.05, down 42¢
Yield: 2.4%
Intact – Canada's largest provider of home, auto and business insurance – is "an astute acquirer in a fragmented market," Mr. Newman says. The stock is currently experiencing a period of uncharacteristic weakness, with a price-to-earnings multiple of less than 13 times next year's estimates (compared with a five-year average of about 15.6 times). The 2.4-per-cent yield isn't huge, but the company reliably raises its dividend every year – at an annualized pace of more than 9 per cent since 2010. "We see future acquisitions as a source of unpriced upside" in the stock, he says.
Power Financial Corp. (PWF-TSX)
Price: $36.51, up 22¢
Yield: 4.1%
Power Financial's two main businesses – wealth management through IGM Financial Inc. and insurance through Great-West Lifeco Inc. – "have secular tailwinds given demographic trends and an aging population," Mr. Newman says. After going six years without a dividend increase, Power Financial in March raised its payment by 6.4 per cent – following increases from IGM and Great-West – and Mr. Newman expects a similar increase next year. The shares trade at about 11.2 times 2015 estimates and "we view the stock as low risk," he says.
John Heinzl