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For Renato Anzovino, yield is overrated.

When the portfolio manager at Heward Investment Management Inc. is hunting for promising stocks, he’s more interested in a company’s dividend growth. The yield may be modest, but if the dividend is growing, it’s often a bullish sign.

“When a company increases the dividend, it gives me confidence that the underlying business is doing very well and that management foresees better times ahead. They see higher profits and higher free cash flow in the future, which all leads to higher returns,” Mr. Anzovino says.

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The strategy has produced solid results.

Since the Montreal-based firm launched the Heward Canadian Dividend Growth Fund a decade ago, it has posted an annualized total return − including dividends – of 9.85 per cent through June 30. That tops the total annualized return – also including dividends – of the S&P/TSX Composite Index by about two percentage points. (Because the $60-million Heward Canadian Dividend Growth Fund is a pooled fund sold directly to accredited investors, returns are reported before fees, which vary depending on the size of a client’s investment. Fees range from about 0.5 per cent to 1.25 per cent.)

A rising dividend alone isn’t enough for a stock to make it into the fund. Mr. Anzovino also looks for strong and growing free cash flow, a management team that reinvests prudently in the business and an attractive valuation as measured by price-to-earnings, price-to-cash flow, intrinsic value and other metrics.

To improve diversification and control risk, the fund caps its weighting to the financial sector at 25 per cent and limits materials and energy stocks to 15 per cent.

Shown below are four of Mr. Anzovino’s favourites right now. Be sure to do your own due diligence before investing in any security.

Open Text Corp. (OTEX-TSX)

Price: $55.52

Yield: 1.6 per cent

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Technology companies aren’t usually top of mind with dividend investors, but enterprise software provider Open Text has hiked its payment six times – at a compound annual rate of more than 15 per cent – since declaring its first dividend in 2013. Management has a strong track record of acquiring businesses and improving margins, and the company’s transition to cloud services – including a partnership with Alphabet Inc.'s Google – “increases recurring revenue, leading to more predictability and less volatility of earnings and cash flow,” Mr. Anzovino says. Even after a nice run this year, the stock trades at about 14 times estimated 2020 earnings – a discount to peers that trade at an average of about 20 times earnings, he says.

Jamieson Wellness Inc. (JWEL-TSX)

Price: $21.21

Yield: 1.7 per cent

Jamieson is Canada’s largest manufacturer of vitamins, supplements and natural health products, but the stock was looking sickly after disappointing results last fall. “When it got beaten up, we added it,” Mr. Anzovino says. Despite its short-term challenges, the company’s long-term outlook is strong thanks to favourable demographics, growing demand for health-related products and opportunities for expansion in Asia, he says. The company went public in 2017 and soon began paying a quarterly dividend of 8 cents a share, which it raised to 9 cents last August. Given that Jamieson’s payout ratio is less than 50 per cent and its earnings are growing by double digits, the company will likely continue to increase its dividend, he says.

Canadian Tire Corp. Ltd. (CTC.A-TSX)

Price: $145.20

Yield: 2.9 per cent

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Canadian Tire’s sales and earnings have been rising steadily, contributing to annualized dividend growth of nearly 19 per cent over the past five years. The company – which owns Marks, Sport Chek and other banners in addition to its namesake chain – has been rolling out initiatives to drive future growth. These include the launch of the Triangle Rewards loyalty program and home delivery to counter the threat from Amazon.com Inc. Yet, Canadian Tire’s stock trades at a modest multiple of about 10.2 times estimated 2020 earnings and is significantly discounted relative to the value of the company’s retail, financial services and real estate assets, Mr. Anzovino says.

TMX Group Ltd. (X-TSX)

Price: $92.03

Yield: 2.7 per cent

Shares of TMX Group – whose operations include the Toronto Stock Exchange, TSX Venture Exchange, Canadian Depository for Securities Ltd. and TMX Datalinx – have surged about 30 per cent in 2019, but Mr. Anzovino is betting there is more to come. With a price-to-earnings multiple of less than 16 based on 2020 estimates, the stock is “trading at a significant discount relative to its peers,” he says. The company held its dividend steady for about six years but since 2016 it has raised its payment four times, and Mr. Anzovino sees further increases ahead as TMX is transforming itself into a “more predictable business based on technology services and data analytics, which will result in growing free cash flow leading to continued dividend growth.”

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