John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.
When Dennis Mitchell is hunting for great dividend stocks, there's one factor he considers above all others.
"We're looking for a history of growing that dividend," the senior portfolio manager with Sprott Asset Management says.
"If you've got a track of growing your dividend, then obviously you've prioritized that and the chances of you doing something that would jeopardize a long streak of growing dividends are probably slim."
A rising dividend alone doesn't necessarily indicate a thriving company, although it's often a strong sign. That's why Mr. Mitchell also wants to see solid free cash flow, high margins and low debt – all of which enhance the company's ability to grow the dividend. Share buybacks and modest capital reinvestment needs are also pluses, he says.
"If you've got a business that throws off $100-million of operating cash flow, but the business requires you to reinvest $90-million of that every year, that's probably not a business that's going to pay a stable or consistent or meaningful dividend," he says.
Mr. Mitchell manages four Sprott mutual funds: Sprott Focused U.S. Dividend Class, Sprott Focused Global Dividend Class, Sprott Global Real Estate Fund and Sprott Global Infrastructure Fund. Here are five dividend stocks he currently holds in one or more of those funds.
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Pembina Pipeline Corp. (PPL-T)
Closing price: $43.78
Yield: 4.66 per cent
Pembina owns and operates a network of conventional, heavy oil and oil sands pipelines, natural-gas gathering and processing facilities and other energy-infrastructure assets. It has a solid dividend track record, having raised its payment at a compound annual rate of about 4.7 per cent over the past five years. Its recently announced $9.7-billion acquisition of Veresen Inc. should extend that dividend growth streak, with Pembina promising a 5.9-per-cent hike to its monthly dividend when the deal closes. Pembina's valuation is reasonable at about 11.5 times estimated 2018 adjusted cash flow from operations, Mr. Mitchell says. Another plus: More than 85 per cent of the combined company's cash flow will come from low-risk, fee-for-service contracts with no exposure to commodity prices.
Comcast Corp. (CMCSA-Q)
Closing price: $38.82
Yield: 1.62 per cent
Comcast is one of the world's largest media and communications companies, providing cable, Internet and phone services through Comcast Cable and operating TV channels (including NBC, CNBC and MSNBC), the Universal Pictures film studio and related theme parks through NBCUniversal. Comcast's yield is modest, but the company has raised its dividend at a five-year compound annual rate of 14.5 per cent and also regularly buys back its own shares, with $5-billion (U.S.) of repurchases expected this year. Another reason Mr. Mitchell is bullish: Comcast recently launched Xfinity Mobile, a wireless service that combines Verizon Communications Inc.'s network with Comcast's 16 million WiFi hotspots. "The new wireless offering, combined with cable, high-speed Internet and home phone, should allow Comcast to reduce customer churn and drive shareholder value up meaningfully over the long term," he says.
Brookfield Property Partners LP (BPY.UN-T)
Closing price: $29.29
Yield: 5.51 per cent
Brookfield Property Partners, 62-per-cent owned by Brookfield Asset Management Inc., is a global real estate company that owns and operates office, retail, residential, industrial, hospitality and self-storage assets. Since the partnership was spun out as a separate entity in 2013, it has generated a compound annual total return – including distributions – of about 11.1 per cent for Canadian investors. Even as the unit price has gone sideways for the past couple of years, the company's underlying value has increased materially, Mr. Mitchell says. What's more, the company has a $6-billion (U.S.) development pipeline, and current market rents indicate potential upside of 15 per cent to 20 per cent when leases in the core office and retail portfolios are renewed in 2017. Adding to the appeal of the high yield, Brookfield Property aims to raise the distribution at a rate of 5 per cent to 8 per cent annually.
UnitedHealth Group Inc. (UNH-N)
Closing price: $168.12 (U.S.)
Yield: 1.49 per cent
Shares of UnitedHealth have been on a long-term roll, producing a total annualized return – including dividends – of about 27.7 per cent over the past five years. Yet the stock is still cheap, Mr. Mitchell says: It trades at about 16 times estimated 2018 earnings per share, less than the S&P 500's forward price-to-earnings multiple of about 18, even as UnitedHealth's earnings are expected to grow about 1.5 times faster than the S&P 500's. The provider of health-care coverage and medical benefits has raised its dividend at a five-year compound annual rate of 31 per cent and repurchased more than $15-billion (U.S.) of shares since 2010. "For all the complexity of the health-care system, UnitedHealth is a pretty simple business: You cover more people, you take in more premiums. You manage the business more efficiently, you keep more of it in terms of earnings," he says. UnitedHealth's Optum division – which provides technology solutions to the health-care system – is another avenue of growth.
Intercontinental Exchange Inc. (ICE-N)
Closing price: $59.00 (U.S.)
Yield: 1.36 per cent
Intercontinental operates stock, futures and options exchanges, over-the-counter markets and clearing houses around the world. The company, best known as the owner of the New York Stock Exchange, dominates the U.S. initial public offering market and its NYSE Arca exchange lists the vast majority of U.S. exchange-traded funds. "However, it is the data business … that is the real growth engine and is characterized by high levels of recurring revenue," Mr. Mitchell says. The modest yield won't make you rich, but the company has been raising its dividend at double-digit rates annually, including an increase of 17.6 per cent announced in February. He considers the stock fairly valued, trading at about 18.2 times estimated 2018 earnings per share.