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Dividend lovers take note

Fund manager says there is still lots of value to find on the stock market

INVESTMENT REPORTER

Attention dividend investors: You haven't missed the boat.

True, the stock market has been on steroids since hitting its March lows, but there are still plenty of juicy dividend yields out there.

And as the economy gradually recovers, the risk of companies cutting their payouts is fading, removing a key source of worry for income-seeking investors.

All of which means that dividend stocks still offer decent value, particularly for long-term investors who can tolerate more short-term volatility.

That's the word from Juliette John, senior vice-president with Bissett Investment Management.

As the lead manager of the Bissett Dividend Income Fund and Bissett Canadian Dividend Fund, Ms. John looks for companies that offer growth at a reasonable price - GARP for short.

In other words, these are companies whose earnings and dividends are expected to rise over time, but which aren't trading at excessive valuation multiples.

"You can really destroy a lot of value by overpaying for a security. It could be a great company but it may not necessarily be a good investment if you overpay for it at the outset," she says.

With that in mind, we asked Ms. John to talk about some of her favourite dividend stocks.

Canadian banks

Remember a few months back when everyone was worried that the banks would cut their dividends? Forget about it, Ms. John says.

"We don't see dividend cuts for the banks," she says. With the economy stabilizing, "I think that window has shut to some extent."

Even after the recent market rally, bank dividend yields are still tempting.

The Big Five are now yielding an average of about 5.25 per cent - significantly higher than the long-term average of about 3.5 per cent for the sector.

On a more sobering note, the days of hefty dividend increases may be over for now. But as bank earnings start to recover, Ms. John expects dividend growth to resume by 2011.

Reitmans

The slump in consumer spending has hit most retailers hard, including Reitmans. But the conservatively run women's wear merchant has a bulletproof balance sheet - including about $150-million in cash - that will see it through the lean times and should keep its dividend safe, Ms. John says.

What's more, the recent strength of the Canadian dollar should benefit Reitmans, which purchases most of its merchandise overseas.

"As the dollar strengthens, their gross margins should improve," she says.

BCE and Rogers

After its leveraged takeover fell apart last year, BCE has become more shareholder-friendly: It has been buying back stock, raising its dividend and cutting costs.

Rogers Communications also boosted its dividend earlier this year and recently announced a larger-than-expected share buyback.

As for coming wireless competition, given the sluggish economy and tight credit markets, Ms. John doesn't think the new players will pose a serious threat to giants such as BCE and Rogers, both of which are among the largest holdings in her funds.

Thomson Reuters

Created by last year's merger of Thomson Corp. with Reuters Group PLC, Thomson Reuters is one of the world's largest database companies, providing electronic information such as court records, medical data and financial analysis to lawyers, doctors and brokers.

"We think there is still a lot of incremental revenue and cost synergies that they can extract from that business combination," Ms. John says of the company, whose stock is yielding 3.7 per cent.

"Ultimately it's a story that is going to be able to generate a significant amount of free cash flow which they will be able to use to either buy back stock, pay down debt or raise the dividend over time."

*****

Fund banks on yield

Bissett Dividend Income Fund - Top 10 Holdings - as of May 31
Company Ticker % of portfolio (May 31) % Div. yield (June 15)
Royal Bank of Canada RY-T4.06%4.4%
TMX Group Inc.X-T3.36%4.6%
Power Financial Corp.PWF-T3.09%5.3%
Canadian Utilities Ltd., ACU-T2.94%3.9%
BCE Inc.BCE-T2.84%6.4%
Calian Technologies Ltd.CTY-T2.68%4.2%
Enbridge Inc.ENB-T2.65%3.7%
Reitmans (Canada) Ltd., ARET.A-T2.62%5.0%
TransCanada Corp.TRP-T2.61%4.4%
IGM Financial Inc.IGM-T2.47%5.0%
Source: Bissett, Globe Investor

© 2007 The Globe and Mail. All rights reserved.

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