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John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.
Greg Newman owns all of the usual dividend suspects in his clients' portfolios: banks, utilities, pipelines, insurers, telecoms.
But the associate portfolio manager with ScotiaMcLeod also likes to play around the edges with higher-risk stocks that can potentially produce better-than-market returns.
Unlike many classic dividend payers, these aren't the sort of companies you can tuck away and forget about. They require careful monitoring and a deep understanding of the business. In some cases, the companies face challenges that have knocked the shares down to what he considers an attractive valuation.
"These are not the cornerstones of a portfolio," Mr. Newman says. "But if you're doing your homework and you're following the story, I think you can capture some extra upside … by owning these sorts of companies."
Before we get into some names, a couple of caveats are in order. First, when it comes to higher-risk stocks, Mr. Newman recommends an equity portfolio weighting of no more than 1 per cent for each company. Second, if you're stepping out on the risk curve, you need to accept the possibility that some stocks won't pan out as you had hoped, he says.
"If you buy 10 of them, one of them is going to disappoint you for sure," he says.
Get the picture? These aren't your typical widows-and-orphans dividend stocks.
With those warnings out of the way, here's a sample of higher-risk dividend stocks that Mr. Newman has been buying recently.
Price: $35.38, down 32 cents
Yield: 3.6 per cent
DH was recently targeted by a U.S. hedge fund that accused the company of trying to "obfuscate deteriorating performance with desperate M&A and accounting tricks." The stock sank on the news, but "we do not buy the short thesis and view the current weakness as an opportunity," Mr. Newman says. DH – formerly Davis & Henderson – has transformed itself from a cheque printer into a diversified technology provider to the financial services industry. He likes the shares because the dividend is "well covered," the company stands to benefit as banks upgrade their systems and, after the recent tumble, the stock trades at a discount to its peers.
Killam Properties Inc. (KMP-T)
Price: $10.39, down 2 cents
Yield: 5.8 per cent
Focused primarily on Atlantic Canada and Ontario, Killam Properties owns a $1.8-billion real estate portfolio that includes rental apartments, furnished suites, seasonal resorts and manufactured homes on leased land. The distribution has been growing, albeit slowly – the most recent increase was in January, 2014. And thanks to improving results, the payout ratio has been falling, to about 91 per cent of adjusted funds from operations (AFFO) for the 12 months ended June 30, 2015, from about 99 per cent in the year-earlier period. The company's recently announced plan to convert to a real estate investment trust (REIT) should free up more cash for distributions, providing a catalyst for the stock, he says.
Hudson's Bay Co. (HBC-T)
Price: $22.85, down 3 cents
Yield: 0.9 per cent
Hudson's Bay Co.'s tiny yield isn't going to make anyone rich, but the dividend will likely rise through a combination of acquisitions, new store openings and online sales growth, Mr. Newman says. Another potential catalyst for the stock: The retailer – whose banners include Hudson's Bay, Home Outfitters, Saks Fifth Avenue and Lord & Taylor – earlier this year agreed to contribute $3.8-billion of real estate to joint ventures with United States-based Simon Property Group and Canada's RioCan REIT, with possible initial public offerings to come. "We value the underlying sum of the parts business at $40 per share but acknowledge that the key catalyst to drive the share price will be success with the retail business," Mr. Newman says.
InnVest REIT (INN.UN-T)
Price: $5.09, down 15 cents
Yield: 7.8 per cent
InnVest owns one of Canada's largest lodging portfolios, with about 115 hotels under such brands as Comfort Inn, Hilton, Holiday Inn and Travelodge. With the loonie trading at a sharp discount to the U.S. dollar, "Americans are increasingly coming to Canada and Canadians are vacationing more at home," Mr. Newman says. In recent years, InnVest has been selling non-core assets and using the cash to spruce up properties and reduce debt. Growth in revenue per room and improving margins are expected to drive InnVest's cash flow higher, he says. The yield is "attractive," and the estimated 2015 payout ratio of 88 per cent of AFFO is down from about 91 per cent in 2014. The stock trades at about 11.5 times current year's estimated AFFO, compared with a five-year average of 13.3 times.
Yield Hog is part of Globe Unlimited's Strategy Lab series. Subscribers can read more at tgam.ca/strategy-lab.