John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.
When Renato Anzovino is hunting for promising dividend stocks, he doesn't just pick the company with the highest yield. Instead, he looks for stocks with modest payouts that can grow.
"Dividend growth conveys a confident message to shareholders and capital markets that the current business is strong and the outlook is positive," says the vice-president and portfolio manager with Heward Investment Management.
"We look for dividend yields in the 2- to 4-per-cent range supported by a strong free-cash-flow growth profile."
A rising dividend isn't the only criterion for inclusion in Heward's Canadian Dividend Growth Fund, a pooled fund available to clients who invest a minimum of $150,000 or qualify as accredited investors. Mr. Anzovino also looks for a straightforward business model, low debt, predictable earnings and proven management team.
Here are some of the fund's current holdings, along with Mr. Anzovino's reasons for owning them. His comments have been edited and condensed. Remember to do your own due diligence before investing .
Pason Systems Inc. (PSI - TSX)
Yield: 2.2 per cent
Five-year annualized dividend growth: 18.9 per cent
Pason provides data management systems for land and offshore oil rigs. The energy sector is increasingly dependent on technology to ensure that companies are operating at peak capacity and without mechanical deficiencies that could cause them to have to shut down for maintenance. Pason's products fill this niche market and enjoy a majority share in many of the jurisdictions where the company operates, with recurring revenue that protects Pason from fluctuations in energy prices. The recent weakness in the share price presents a great buying opportunity.
Yield: 3.9 per cent
Five-year annualized dividend growth: 2.9 per cent
Cineplex is the largest operator of movie theatres in Canada and its lineup includes premium-priced, higher-margin products such as 3-D and IMAX movies, VIP seating and enhanced concessions offerings. Revenue per patron continues to grow, attesting to the stability of its business model. Last year, Cineplex acquired a number of Empire's theatres in Atlantic Canada, giving it true coast-to-coast reach. The 2014 movie offerings have been lacklustre so far, but 2015 is looking considerably more promising with titles including Star Wars Episode VII, Jurassic World and Fast and Furious 7, which should provide a boost to revenue.
Evertz Technologies Ltd. (ET - TSX)
Yield: 3.7 per cent
Five-year annualized dividend growth: 44.8 per cent
Evertz designs, manufactures and markets video and audio infrastructure equipment for the production, postproduction and transmission of TV content. The company has a strong balance sheet with no debt and $210-million of net cash. Evertz grows its dividend regularly and late in 2013 issued a $1.30 special dividend. The company has been increasing its international exposure, with 45 per cent of total revenue now generated outside North America. Europe's infrastructure upgrade cycle is under way, while in Asia, as the middle class grows, there will be increasing demand for broadcasters to reach more areas and at higher quality.
Rogers Communications Inc. (RCI.B - TSX)
Yield: 4.3 per cent
Five-year annualized dividend growth: 10.6 per cent
Our investment in Rogers is primarily based on its wireless business. As more people adopt smartphones, the amount of data consumed will increase. With its high levels of cash flow, Rogers grows its dividend often. In addition, Rogers has hidden assets not fully valued by the market. Its towers (real estate value) and, more recently, a 12-year deal with the NHL provide additional value. The threat of a fourth national carrier has been in the news and has caused the price of Rogers to fall, but our view is that it will be a financial challenge for a fourth national carrier. As new management executes the business plan, we believe the market will see the benefits over the next six to 18 months.
Yield: 2.1 per cent
Five-year annualized dividend growth: 7.1 per cent
TransForce provides trucking, courier, logistics and waste management services and is strategically placed to benefit from increased demand for transportation, especially due to e-commerce. TransForce continues to grow through strategic and accretive acquisitions, and while these deals have increased the company's debt levels, TransForce's strong cash flows will allow it to rapidly pay down debt, further increasing earnings per share. As the company continues to grow, the option of spinning-off certain segments would provide significant shareholder value. In spite of the recent stock appreciation, TransForce is still a very good long-term investment.
John Heinzl