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retirement stock picks


During times of market volatility, investors need every edge they can get.

Dividend stocks can offer peace of mind. Investors who hold them inside a registered retirement savings plan earn tax-sheltered income while waiting for them to appreciate. Owning dividend stocks from the United States is also a plus because the payouts aren't hit with foreign withholding taxes as they would outside an RRSP.

Dividend plays may conjure images of boring, mature companies, but more firms are offering juicy payouts nowadays, and these businesses also have strong growth potential.

We asked three portfolio managers for dividend picks that would suit an RRSP.

Brian Tidd, portfolio manager with Invesco Canada Ltd.

  • TransForce Inc. (TFI-TSX)
  • Wednesday’s close: $29.25 a share
  • 52-week range: $22 to $30.27 a share
  • Annual dividend: 68 cents a share

Montreal-based TransForce, which is Canada's largest player in the trucking and logistics industry, will benefit from recent acquisitions and asset sales, said Mr. Tidd, who oversees the Trimark Canadian Plus Dividend fund.

The package-and-courier services division generates 40 per cent of its revenue, while its truckload business (shipments from various clients) constitutes less than 40 per cent.

TransForce is a consolidation story, with expectations of cost savings as it absorbs companies purchased in the past couple of years. It plans to spin off its waste hauling and truckload businesses, while its e-commerce operation is growing with partners such as Google Inc. for deliveries in U.S. cities as part of the Web giant's Amazon-like store called Google Shopping Express. An aggressive acquisition strategy could be a distraction, but management is taking a pause.

TransForce's recent 17-per-cent dividend increase reinforces its "dividend-growth story," Mr. Tidd added. His target price, or "fair value" estimate for the stock, is about $35 a share.

  • KLA-Tencor Corp. (KLAC-Nasdaq)
  • Wednesday’s close: $67.80 (U.S.) a share
  • 52-week range: $59.44 to $84.21 a share
  • Annual dividend: $2 a share

KLA-Tencor, which sells equipment to the semiconductor industry to detect problems in chip-making, is benefiting from a broader trend toward miniaturization, said Mr. Tidd. The California-based company is the global leader, with about 55 per cent of market share, as process-control equipment grows as a percentage of capital expenditures for companies such as Intel and Samsung.

KLA-Tencor, which has raised its dividend consistently since 2005, recently offered its shareholders a special payout of $16.50 a share. "The stock dropped to reflect the payout," but the opportunity for continued dividend growth is very high, Mr. Tidd said. The company, which generates lots of free cash flow, has also authorized $2.5-billion to buy back shares over the next 12 to 18 months.

Cyclical downturns in the semiconductor industry are a risk, but the industry has matured, so these periods are less volatile, he noted. "Fair value [for the stock] would be somewhere in the mid-$80 range."

Andy Nasr, portfolio manager with Middlefield Capital Corp.

  • Cargojet Inc. (CJT-TSX)
  • Wednesday’s close: $26.07 (Canadian) a share
  • 52-week range: $13.52 to $28.30 a share
  • Annual dividend: 60 cents a share

Cargojet shares are poised to take flight since the company won a seven-year contract from Canada Post, said Mr. Nasr, who owns Canada's largest cargo airline in his Middlefield Canadian Dividend Growth fund.

The company, based in Mississauga, already has a stable, overnight cargo business with United Parcel Service Inc. and FedEx Corp. Now with the Canada Post contract, Cargojet is adding eight aircraft that could also be used on weekends for other revenue purposes.

The company's earnings before interest, taxes, depreciation and amortization (EBITDA) is estimated to increase to about $60-million by 2016 from $20-million in 2014, Mr. Nasr said. "The stock is cheap, trading at slightly less than six times 2016 EBITDA, and the company could be an acquisition candidate," he said.

The risk is whether Cargojet can execute well on its contract and charter opportunities, he added. His one-year target is $30 a share.

  • AltaGas Ltd. (ALA-TSX)
  • Wednesday’s close: $40.00 a share
  • 52-week range: $36.19 to $53.06 a share
  • Annual dividend: $1.77 a share

AltaGas provides infrastructure services to oil and gas producers, but the Calgary-based company has been shifting to the power and utility sectors with the aid of key acquisitions, said Mr. Nasr. "Its stock has fallen [amid plunging oil prices] because there is still this perception that it is commodity-focused."

He expects EBITDA to increase to $750-million by 2016 from about $550-million in 2014 as power projects nearing completion begin to produce income. They include hydro assets that are underpinned by 25-year contracts.

"Eighty per cent of AltaGas is really a regulated utility and power-oriented business," he said. "There is going to be stable growth, and you are going to get dividend growth in the mid-single digits – if not low double digits."

He also sees more upside if AltaGas co-develops facilities to export liquefied natural gas (LNG) to other parts of the world, but that is a 2017-to-2019 story, he said. His one-year target is $50 a share.

Gil Lamothe, portfolio manager with Industrial Alliance Investment Management Inc.

  • Fortis Inc. (FTS-TSX)
  • Wednesday’s close: $39.38 a share
  • 52-week range: $29.78 to $40.83 a share
  • Annual dividend: $1.36 a share

Fortis is a utility company, so it is less vulnerable to economic downturns, but it also has a "fairly healthy growth profile," said Mr. Lamothe, who owns the stock in his IA Clarington Canadian Dividend and Dividend Growth funds.

"It has grown through acquisitions over the last four years or so, and now it is in a position to grow more organically," he said. "Most of their revenues are regulated."

Fortis shares went through a rough patch while the company was making acquisitions, but "the dividend pays for you to wait until those investments start to generate their returns," he said. "That is the period we are coming into now."

Rising interest rates present a risk because Fortis has debt payments, but that can be mitigated by utility rate increases, he added.

Fortis, which has raised its dividend 41 years in a row, would be a solid candidate for RRSP investors wanting more defensive exposure, he said. "It's a stock that you would want to own for the next 10 or 15 years."

  • Johnson & Johnson (JNJ-NYSE)
  • Wednesday’s close: $105.56 (U.S.) a share
  • 52-week range: $86.09 to $109.49 a share
  • Annual dividend: $2.80 a share

Johnson & Johnson, a maker of pharmaceuticals, medical devices and consumer health-care products, is suitable for an RRSP because of its defensive nature, said Mr. Lamothe. "They make things that people will need regardless of the state of the economy."

The company, which has been raising its dividend for 52 consecutive years, also does a good job of assessing the risks of its products – be it a drug or a medical device, he said. It factors in the potential for losses such as those that would result from lawsuits, and often has several drugs in the pipeline to avoid focusing on a blockbuster medication that could make or break the company, he noted.

Johnson & Johnson, which has a strong brand name and a high degree of goodwill, would be a solid holding for investors seeking health care exposure as opposed to a pure pharmaceutical company that is reliant on a few drugs, he said. "It is diversified, and that is one of its strengths."