With the year-end IRA push nearly upon us, it’s time to look at where to invest, writes John Heinzl, reporter and columnist for Globe Investor.
I don’t know about you, but I love this time of year: Only 25 sleeps until tax-free savings account contribution day!
With that in mind, Yield Hog presents a list of top dividend stock picks for 2012, courtesy of McLean & Partners Wealth Management.
You don’t have to put them in your TFSA, of course. In fact, you should do your own due diligence before you invest in these or any other companies. Our goal here is to merely provide some ideas—a jumping-off point for further research.
[The near-exact equivalent of the Canadian TFSA is the IRA. This article was written originally for a Canadian audience, so there are minor differences between the two accounts—Editor.]
McLean & Partners, which manages portfolios for high-net-worth individuals, focuses on global companies with a market capitalization of at least $1 billion and a track record of increasing dividends. It invests in non-dividend stocks, too, but dividend growers account for about 70% of the equity component of the portfolios it manages.
"We prefer companies that can pay a decent dividend now and preferably grow it," said Tyler Simms, an investment associate with the Calgary-based firm. "Long term, you’ve seen that style of investing proving time and time again to outperform."
Here’s a sample of its "core" holdings, along with the dividend yield, payout ratio (dividends as a percentage of trailing 12-month profit), five-year annual dividend growth rate, and price-to-earnings ratio (based on estimated earnings for the next 12 months).
Generally speaking, the lower the payout ratio, the safer the dividend. A high dividend growth rate is also a plus, as is a low P/E, although these are just guidelines and each stock should be judged on its own merits.
NEXT: The Picks
|pagebreak|Bank of Nova Scotia (BNS)
- Yield: 4.3%
- Payout ratio: 45%
- Div. growth: 7%
- P/E ratio: 10
After putting dividend increases on hold for a couple of years after the 2008-09 financial crisis, Bank of Nova Scotia raised its payment in March, "and we anticipate another dividend hike in the next six months based on recent results," Simms said.
The balance sheet is solid, and the business is well diversified, with about 35% of net income coming from international operations, focusing on Central and South America. "It’s almost like a conservative banking play with an international growth kicker," he said.
SNC-Lavalin Group (Toronto: SNC)
- Yield: 1.7%
- Payout ratio: 24%
- Div. growth: 25%
- P/E ratio: 19
A major engineering and construction firm, SNC-Lavalin operates around the world in industries such as mining, power, water, petroleum, and mass transit. "As an industrial, it’s leveraged to global growth," he said. "We love that they have a significant backlog in business."
The yield isn’t huge, but the dividend’s growing quickly and the payout ratio is conservative. Plus, the stock is well off its highs, which should appeal to investors who like to buy companies when they’re on sale.
Microsoft (MSFT)
- Yield: 3.1%
- Payout ratio: 23%
- Div. growth: 13%
- P/E ratio: 9
As much as some people love to bash Microsoft, it’s a cash machine, and it’s shoveling more and more of the green stuff to shareholders every year in the form of dividend hikes. On September 30, the software giant was sitting on $57.4 billion—or about $6.80 a share—of cash and short-term investments.
Microsoft may not be known for innovation, but with Windows 8 coming out next year, "it’s a conservative tech play. One with limited downside, given the valuations and the dividend yield," he said.
Deere & Co. (DE)
- Yield: 2.1%
- Payout ratio: 21%
- Div. growth: 14%
- P/E ratio: 10
Deere’s farm equipment helps to feed people around the world, and its growing dividend has been doing a fine job of feeding hungry investors. Equipment sales were up 20% in the most recent quarter, and the company predicts sales will rise 15% next year.
"They have new factories in China, Brazil, and India, so we’re seeing increasing sales coming from outside of North America, which I think is positive," he said.
Cummins Inc. (CMI)
- Yield: 1.7%
- Payout ratio: 17%
- Div. growth: 32%
- P/E ratio: 11
Cummins manufactures diesel engines used in trucks, buses, heavy machinery, and marine applications. It also makes power generation and emissions-control equipment, which positions it to benefit from more stringent environmental regulations.
"It’s a nice little growth story. This is a business where they’ve got almost a quarter of their revenues in emerging markets," he said. "We see traction there and we think it has significant capacity to increase the dividend."
The payout ratio remains conservative, even though the dividend has more than doubled in the past two years.
