Dennis Mitchell of Sprott Asset Management. He was formerly with Sentry Investments.
John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.
For some investors, the search for great dividend stocks starts and ends with the yield. The higher the payout, the more desirable the stock – or so they believe. Not Dennis Mitchell.
"I'm not looking for the highest-yielding name," the senior portfolio manager with Sprott Asset Management says. "I'm looking for companies, first and foremost, that can grow their dividend."
Whether a stock yields 1 per cent or 5 per cent, a growing dividend is a positive sign, he says. It indicates that the business is generating increasing amounts of cash, and it signals that the company is managing that cash prudently instead of blowing it on misguided ventures, he says.
In the two dividend funds he manages – the Sprott Focused U.S. Dividend Class and Sprott Focused Global Dividend Class, both launched in November – Mr. Mitchell holds a mix of higher-yielding and lower-yielding names. Apart from a growing dividend, these businesses share several other attributes, including: low debt levels, high returns on invested capital, a differentiated product or service and pricing power.
With expected annual turnover of 30 per cent to 40 per cent, the funds don't follow a strict buy-and-hold strategy preferred by many dividend investors. "There is some tactical trading," Mr. Mitchell says. "I'll take advantage of opportunities that the market provides me with, but my core strategy is to buy excellent businesses when they're trading below intrinsic value and hold them for hopefully long periods of time."
Here is a sample of the funds' current holdings. Remember to do your own due diligence before investing in any security, and be mindful of the tax consequences of investing outside Canada.
Nike Inc. (NKE – NYSE)
Price: $61.49 (U.S.)
Yield: 1 per cent
Nike is a classic case of a stock with a low yield but a high total return – the athletic apparel giant has gained a staggering 28 per cent annually, including dividends, over the past five years. And Mr. Mitchell thinks Nike still has lots of growth ahead. "This is one of the larger, dominant consumer franchises on the planet," he says. Nike's stock never looks cheap – it currently trades at 28 times fiscal 2016 estimated earnings – but the payout ratio is conservative at 28 per cent and the five-year annualized dividend growth rate is more than 15 per cent.
McKesson Corp. (MCK – NYSE)
Price: $158.87 (U.S.)
Yield: 0.7 per cent
As one of the three largest U.S. drug distributors, McKesson operates in an oligopolistic industry that benefits from high barriers to entry and strong returns, Mr. Mitchell says. What's more, at a time when health-care costs are soaring and drug companies frequently come under attack from politicians, McKesson is "on the side of the angels" because it aims to keep drug costs down by negotiating bulk discounts from pharmaceutical makers. The stock trades at an inexpensive multiple of 12.3 times estimated earnings for the year ended March 31 and its dividend "should grow at high single digits going forward," he says.
MacQuarie Infrastructure Corp. (MIC – NYSE)
Price: $65.22 (U.S.)
Yield: 7 per cent
MacQuarie operates a portfolio of infrastructure businesses including airport services (Atlantic Aviation), bulk petroleum and chemicals storage (International-Matex Tank Terminals), gas processing and distribution (Hawaii Gas) and a small group of thermal, wind and solar power generating facilities. Infrastructure businesses generally produce steady cash flows and, although MacQuarie's yield may seem on the high side, the company recently reiterated that it expects the dividend to grow by 12 per cent to 14 per cent in 2016. The EV/EBITDA multiple (enterprise value to earnings before interest, taxes depreciation and amortization) of 12 is "reasonable" and the dividend is "very sustainable," Mr. Mitchell says.
Brookfield Infrastructure Partners LP (BIP.UN – TSX)
Price: $53.18 (Canadian)
*Yield: 5.6 per cent
Brookfield Infrastructure's assets spans five continents and include ports, toll roads, utilities, railways and communications towers. The vast majority of the assets are contracted or regulated, and most are indexed to inflation, which makes for a "very stable, consistent cash flow stream," Mr. Mitchell says. The Bermuda-based limited partnership is always on the hunt for attractive acquisitions – the deal for Asciano Ltd. of Australia being the latest example. As its asset base grows, the partnership aims to increase its distribution – which is declared in U.S. dollars – by 5 per cent to 9 per cent annually.
(*Yield calculated after converting U.S. dollar distribution to Canadian dollars.)
Visa Inc. (V – NYSE)
Price: $75.38 (U.S.)
Yield: 0.7 per cent
Visa is another low-yielding stock that has produced huge total returns – it's gained about 33 per cent annually, including dividends, over the past five years. The company operates the world's largest payments-processing network and is benefiting from the global move away from cash. Far from posing a threat to Visa, platforms such as Apple Pay and Android Pay that require a credit card "will actually drive additional volumes through the Visa payment network," Mr Mitchell says. Trading at 26.8 times 2016 estimated earnings, the stock may not look cheap, but the dividend has increased at an annual clip of 30 per cent over the past five years and there is much more growth to come, he says.
Disclosure: The author own shares of BIP.UN personally and in his Strategy Lab model dividend portfolio (view it online at tgam.ca/divportfolio).