Top U.S. dividend stocks for your RRSP

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Canadian investors looking for U.S. dividend stocks with handsome payouts are better off stuffing them in a registered retirement savings plan (RRSP).

If they were held in a non-registered account, they wouldn't receive the same tax break on dividends as their Canadian peers. Investors would also face the additional U.S. tax wrinkle in which dividends paid by American companies are subject to a 15-per-cent withholding tax. While this tax is waived for retirement savings accounts such as RRSPs, it is applied to dividends from U.S. shares held in tax-free savings accounts (TFSAs).

Given the diverse array of U.S. dividend payers that offer an opportunity to diversify away from the resource-heavy Canadian market, we asked three portfolio managers to pick stocks that would be suitable for an RRSP.

Andy Nasr, managing director and senior portfolio manager, Middlefield Capital Corp., Toronto

Starbucks Corp. (SBUX-Nasdaq)

• Wednesday’s close: $57.87 (U.S.) a share
• 52-week range: $39.50 to $64 a share
• Annual dividend: 80 cents a share for a yield of 1.38 per cent

Shares of the giant U.S. coffee chain have "tremendous upside" despite last year's stellar run, says Mr. Nasr, who manages the Middlefield U.S. Dividend Growers fund. Seventy per cent of Starbucks' sales are made in North America, but the longer-term tailwind is growth in foreign markets, he said.

New menu offerings and digital initiatives should boost sales per store. Starbucks has a new mobile app that lets customers order and pay before entering its cafés, while expansion of its loyalty program should increase revenue. The company can add $3-billion to $5-billion in debt but maintain its investment-grade rating, he noted.

Starbucks trades at 30 times earnings, but that premium valuation is warranted given that it should deliver double-digit earnings growth this year, he said. A pullback in its stock would be a "buying opportunity," said Mr. Nasr, whose one-year target price is $70 a share.

Apple Inc. (AAPL-Nasdaq)

• Wednesday’s close: $97.39 (U.S.) a share
• 52-week range: $92 to $134.54 a share
• Annual dividend: $2.08 a share for a yield of 2.14 per cent

The first half of 2016 is the best time to buy shares of Apple because excitement for the fall release of its iPhone 7 could be a catalyst for its stock, Mr. Nasr says. Despite concerns about the iPhone representing 65 per cent of the company's sales, Apple should be able to broaden its revenue stream in the longer term with its iWatch, Apple Music, Apple TV or a potential Apple car, he says.

Apple users tend to be brand loyal, while aggressive spending on research and development means more innovative products, he said. "We continue to believe that Apple will demonstrate mid to high single-digit revenue, earnings and cash flow growth."

Should its iPhone 6 shipments lose momentum, its shares will likely be directionless until the iPhone 7 comes out, he said. Apple trades reasonably at 10 times earnings, said Mr. Nasr, whose one-year target is $130 a share.

Pierre Trottier, a portfolio manager with Quebec City-based Industrial Alliance Investment Management Inc.

CVS Health Corp. (CVS-NYSE)

• Wednesday’s close: $94.11 (U.S.) a share
• 52-week range: $81.37 to $113.65 a share
• Annual dividend: $1.70 a share for a yield of 1.81 per cent

The U.S. drugstore giant should benefit from a growing economy, an aging population and its acquisition of a pharmaceutical-services provider to nursing homes, says Mr. Trottier, who manages the IA Clarington U.S. Dividend Growth fund. "It's a nice stable business that is in a sweet spot," he says.

CVS and rival Walgreen Boots Alliance Inc. have close to 50 per cent of the U.S. pharmacy market, but the former is probably a "less risky" stock, he said. CVS has a cleaner balance sheet, focuses on the U.S. market, whose economy is rebounding, and also earns revenue from its pharmacy benefit-management business, he added.

CVS's retail drug business accounts for 46 per cent of sales but 72 per cent of earnings before interest, taxes, depreciation and amortization (EBITDA). The recent market pullback provides a good entry point, he said. "My one-year target is $110 a share."

MetLife Inc. (MET-NYSE)

• Wednesday’s close: $42.91 U.S. a share
• 52-week range: $40.97 to $58.23 a share
• Annual dividend: $1.50 a share for a yield of 3.50 per cent

Shares of the largest U.S. life insurer have taken a beating amid concerns about slumping equity markets that are reducing fees on retirement-income products, and low interest rates hurting its bond portfolios. "The stock is cheap," Mr. Trottier says. "It's trading at 70 per cent of book value."

Metlife has more than 100 million customers in about 50 countries. The strong U.S. dollar has taken a bite out of foreign profits, but the company has a strong balance sheet, with about $10-billion in cash, while its long-term debt is manageable, he added. "I take comfort from seeing strong growth in U.S. employment … and I believe the U.S. interest rates will keep rising slowly," Mr. Trottier said.

A risk to the stock is a continuing low-interest-rate environment, he acknowledged. "The Fed [U.S. Federal Reserve] can increase short-term rates … but we need the 10-year rate to go higher, too." His one-year target price is $57 a share.

Kamran Khan, portfolio manager with Toronto-based Norrep Capital Management Ltd.

Wal-Mart Stores Inc. (WMT-NYSE)

• Wednesday’s close: $61.92 (U.S.) a share
• 52-week range: $56.30 to $90.97 a share
• Annual dividend: $1.96 a share for a yield of 3.17 per cent

Shares of the world's largest retailer struggled last year as earnings missed analysts' estimates, but "the worst is probably over," says Mr. Khan, who manages the Norrep U.S. Dividend Plus fund. Profits were crimped by a strong U.S. dollar, wage increases, price cutting and investments in e-commerce. Last fall, Wal-Mart forecast lower earnings per share for 2016 compared with 2015.

Still, the turnaround seems to be gaining traction as online sales grow at a double-digit pace and the retailer competes against dollar stores with smaller outlets, he said. In the last quarter, its U.S. division posted its fifth consecutive quarter of same-store sales growth.

A slowing U.S. economy is a risk to Wal-Mart, but this defensive consumer-staples stock trades reasonably at 13 times next year's earnings, Mr. Khan says. He expects a potential double-digit gain this year.

Quest Diagnostics Inc. (DGX-NYSE)

• Wednesday’s close: $66.68 (U.S.) a share
• 52-week range: $60.07 to $89 a share
• Annual dividend: $1.52 a share for a yield of 2.28 per cent

The largest U.S. provider of laboratory testing should benefit from an improving economy, an aging population and expanding insurance coverage from the Patient Protection and Affordable Care Act, also known as Obamacare, Mr. Khan says. "Quest also has the leading position in the higher-revenue, higher-margin esoteric [specialized] testing that is growing a lot faster than the routine-testing market," he says.

Medical tests generate recurring revenue and strong free cash flow that can be used for acquisitions, share buybacks and dividends, he added. Quest's valuation is reasonable at 15 times earnings, he said. "This is a stable, defensive business," said Mr. Khan, whose one-year target is $78 a share.

One risk to the stock is cuts in Medicare reimbursement rates for tests. The earliest that could happen would be 2017, and it would affect only about 12 per cent of total revenue, he noted.