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  • Canadian Small-Cap Dividend Stocks For Strong Total Returns

    Dividend stocks have been in vogue for several years, strongly buoyed by investors seeking meaningful yield in a generally yield-starved investment environment. Canadian small-cap dividend-paying stocks have seen especially robust demand. They outperformed their peers paying no dividends over both three- and five-year investment horizons, rallying 44% and 35%, respectively, while non-payers declined 2% and 23%, respectively. Investors pursuing the small-cap income investment strategy can benefit greatly from both rapid growth of the small-cap companies and their high dividend yields for regular income. Indeed, while price volatility and risk of the small-cap stocks are generally higher than those of the large-cap stocks, small cap dividend-paying stocks provide a major opportunity for both strong income growth and capital appreciation.

    There are several small-cap dividend payers among stocks listed on the Toronto Stock Exchange (TSX). A small group of these stocks pay attractive dividend yields that are sufficiently covered by earnings to assure dividend sustainability. A closer look at this selected group of dividend payers reveals investment opportunities for risk-prone investors, who embrace higher risk to achieve higher-than-average rates of return. Still, investors are cautioned to be prudent with their investments in small-cap dividend payers, given that valuations of these investments have been stretched due to a robust demand.

    Here is a quick glance at several TSX-listed small-cap stocks that pay attractive yields on sustainable payout ratios:

    Parkland Fuel, a C$1.2-billion company by market cap, markets and distributes petroleum and other products, including propane, fertilizer, lubricants, home heating oil, other agricultural inputs and industrial products and services, as well as gasoline and diesel. The company's dividend is yielding 5.6% on a payout ratio of 82%. Parkland Fuel's monthly dividends were reduced in January 2011, and have stayed flat since. The stock is trading on a P/E of 14.7, at a premium to its industry (with a P/E of 10.1), but at a discount to its own three-year average of 17.3. With an average daily turnover of 178,000 shares, this stock is selling for C$18.46, up 49% over the past 12 months. The stock has a beta of 0.90, below the market's measure of volatility.

    Bird Construction is a general contractor serving clients in the industrial, mining, institutional, retail, commercial, multi-tenant residential, light industrial, and renovation and restoration sectors. The company engages in general contracting, design/building, construction management, pre-construction services and public/private partnerships. Its market capitalization is C$580 million and average daily trading volume is 37,000 shares. The stock pays a dividend yield of 5.2% on a payout ratio of 65%. Over the past five years, its dividend, paid out monthly, grew at a rate of 10.8% per year. The stock has a P/E of 11.0x, compared to an industry ratio of 26.3x. The stock is trading at C$13.63, up 21% over the past 12 months. Its beta is 1.61, implying significantly higher volatility than the market's.

    Cascades is nearly a C$400-million company by market cap. It produces, converts, and markets packaging and tissue products. The stock is paying a dividend yield of 3.8% on a payout ratio of 63%. The company's quarterly dividend of C$0.04 per share has been fixed since 2003. In terms of valuation, this stock is trading on a P/E of 16.5. For the reference, its rival Orchids Paper Products (NYSEMKT:TIS) has a P/E of 16.4. Cascades' stock, which has an average daily turnover of 105,000 shares, is currently changing hands at C$4.13, up 4.3% over the past 12 months. The stock has a beta of 1.67.

    Calfrac Well Services, with a market cap of C$1.1 billion, is a specialized oilfield services company providing fracturing and coiled tubing services to oil and natural gas E&P companies. Each day, on average, some 249,000 of its shares trade in the open market. The stock pays a dividend yield of 4.1% on a low payout ratio of 27%. Over the past five years, Calfrac Well Services' dividends grew spectacularly, on average, by 58.5% per year. Dividend growth will likely be sustained in the future, albeit at a slower pace. With a P/E of 6.7, the stock is trading at a discount to its industry, whose P/E averages 15.8. Calfrac Well Services' stock is changing hands at C$24.65, down 6.1% over the past year but up 30% over the past five years. Its beta is high at 1.95.

    Canyon Services Group is an oilfield services company, providing specialized stimulation services to exploration and production (E&P) companies. The company has a market capitalization of C$690 million and an average daily trading volume of 195,000 shares. The stock has a dividend yield of 4.6% and a payout ratio of 43%. Its annual dividend payout in 2012 is more than five times larger than last year's. The stock has a P/E of 7.9x, half that of its respective industry. Its price-to-cash flow ratio is also attractive at 6.3 versus 13.3 for its industry on average. The stock is changing hands at C$11.22, down almost 3% over the past year, but up 434% over the past five years. The stock has a high beta of 2.5.

    Horizon North Logistics, a C$745-million company by market capitalization, provides camp management and catering, mobile structures, matting solutions, and northern marine services to resource companies. This stock pays a dividend yield of 2.9% on a payout ratio of 33%. Its quarterly dividend expanded, on average, by 25% over the past year. In terms of valuation, Horizon North Logistics has a P/E of 11.5, trading at a discount to its respective industry with a P/E of 15.8. With an average daily trading volume of 260,000 shares, this stock is changing hands at C$6.89, up 57% over the past 12 months. The stock has a beta of 2.09, more than double the market's volatility.

    Killam Properties, with a market capitalization of C$654 million, is a real estate company, involved in the acquisition, ownership, development, operation, and management of multi-family housing and manufactured home communities in Canada. On average, each day some 128,000 shares of Killam Properties' stock change hands in the market. The stock pays a dividend yield of 4.7% on a payout ratio of 57%. Its dividend grew at an average annual rate of 6.7% over the past five years. The stock has a P/E of 13.0, below the average ratio for its respective industry of 21.6x. The stock is trading at C$10.99, up 8.72% over the past 12 months and 42% over the past five years. Killam Properties trades with a low beta of 0.67, implying lower volatility than the overall market's.

    McCoy, with a market cap of C$116 million, is a provider of specialized equipment, service and replacement components to the global oil and gas sector. It produces drilling and completions equipment as well as heavy duty trailers used in the oil and gas sector for pressure pumping, coil tubing, and rig transport. The stock pays a dividend yield of 4.1% on a payout ratio of 45%. Its dividend grew, on average, by 12.2% per year over the past five years. In terms of valuation, with a P/E of 9.7, the stock is priced below its three-year average of 12.9 and the industry's P/E of 15.8. On average, some 30,000 shares of McCoy change hands in the market each day. The stock is trading at C$4.21, up 46% over the past 12 months. The stock's beta is high at 1.55.

    Russel Metals, a C$1.65-billion company by market cap, is engaged in the processing and distribution of metals. This company pays a dividend yielding 4.9% on a payout ratio of 80%. Its quarterly dividend was slashed in late 2008 and again in the first quarter of 2009; however, since the dividend has increased 40%. The metals processor has a P/E of 17.2, above its three-year average ratio of 16.3x, but below the ratio of its industry on average of nearly 31.0. The stock, which has an average daily turnover of 274,000 shares, is changing hands at C$27.42, up 18.3% over the past year. The stock has a beta of 1.38.

    Exco Technologies, with a market cap of C$231 million, manufactures dies, moulds, equipment, components and assemblies to the die-cast, extrusion and automotive industries. The stock is yielding 2.5% on a payout ratio of only 25%. Its dividend grew, on average, by 18.9% per year over the past five years. This dividend growth stock boasts a P/E of 9.5, trading at a discount to its respective industry, with a P/E of 11.4. The stock, which has an average daily turnover of 40,500 shares, is changing hands at C$5.70, up nearly 73% over the past year. For the change, the stock carries a low beta of 0.25, carrying only a quarter of volatility experienced by the market on average.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Dec 15 3:18 AM | Link | Comment!
  • Women-Led Companies, Including Dividend Yielders, Outperform Male-Dominated Peers

    The connection between gender and corporate profitability does not appear to be so obvious, but empirical research shows that higher participation of women in corporate management is good for the company's bottom line. While the share of women chief executives at the helm of the world's 1000 largest companies remains low at 4% and the percentage of women as executive officers hovers around 14.6%, companies managed by women tend to outperform their peers based on several profitability metrics. Moreover, among the most prominent corporations run by women, several pay attractive dividend yields.

    Evidence from empirical studies of the positive effect from women's participation in executive decision-making on corporate bottom lines is plentiful. According to a multi-annual study by Pepperdine University of the performance of about 200 of the Fortune 500 companies (the ones providing gender breakdown of their executives), it was concluded that the "correlation between high-level female executives and business success has been consistent and revealing."

    Two studies from Catalyst, a non-profit organization that seeks to expand women's roles in the workplace, and a business consultancy McKinsey & Co., support this assertion. The two studies have found that Fortune 500 companies with more women on their boards/executive committees show better financial performance than those with no or low number of women executives. According to Catalyst, in terms of returns on equity, Fortune 500 companies with 3 or more women on the boards/executive committees outperform those with the least by 53%. In terms of returns on sales and returns on invested capital, Fortune 500 companies with 3 or more women on the boards/executive committees outperform their peers with the least by 42% and 66%, respectively. McKinsey has found similar results in its study, concluding that companies with the highest percentage of women in executive bodies show the best performance.

    Now, while the share of women in top executive posts has increased over the past several decades, it remains low by all means. The number of female corporate officers in Fortune 500 companies increased from 11.2% in 1998 to a peak of 16.4% in 2005. It has since dropped to about 15.7%. According to Catalyst, at the observed rate of growth, "it would take 40 years for the number of female corporate officers to match the number of male officers." On the other hand, the share of women-held board seats has risen progressively from 9.6% in 1995 to 16.1% in 2011. However, in terms of Chief Executive Officers (CEOs), the share of women in top post remains low at 3.8% of the Fortune 500 companies, or 19 in total.

    Among Fortune 500 companies, several female-led corporate giants are dividend-paying corporations with a long history of strong earnings power and consistent dividend growth. In fact, out of 19 Fortune 500 companies led by women, 14 or 74% pay a dividend. The largest Fortune 500 company led by a woman is Hewlett-Packard (NYSE:HPQ). Managed by Meg Whitman as CEO, HPQ, the tenth on the list of the world's largest Fortune 500 companies, currently does not espouse all the aforementioned qualities of the women-led corporate giants. In fact, the stock, which has fallen precipitously by 53% over the past year, is a value trap, although it boasts a high dividend yield of 4.1%.

    Several other corporate giants led by women are good examples of business excellence. IBM (NYSE:IBM), as the second-largest company managed by a woman, is a model of outperformance. Over the past five years, the company grew its EPS and dividends at average annual rates of 16.6% and 17.1% per year, respectively. The company currently has a dividend yield of 1.8% on a low dividend payout ratio of only 24%. Its return on equity (ROE) is exceptionally high at 74%. In terms of total returns, investment in this stock five years ago would have returned, to date, 14.6% annually. This is better than for any other stock in the Dow Jones Industrial Average. The cash-rich IBM is likely to continue to boost its dividends in the future. It is one of the preferred stocks of legendary investor Warren Buffett.

    PepsiCo (NYSE:PEP), a Dividend Aristocrat boosting dividends for 39 years in a row, is another female-led corporate giant with outstanding performance. With a dividend yield of 3.1%, this company pays out 57% of its earnings in dividends. It has been growing dividends at a rate of 9.3% per year over the past five years. PepsiCo's total ROE is high at 26.2%.

    Other dividend payers on the list of women-led corporations include food and biofuel maker Archer Daniels Midland (NYSE:ADM), chemicals manufacturer DuPont (NYSE:DD), the copier company Xerox (NYSE:XRX), Sempra Energy (SRA) and legendary soup company Campbell Soup (NYSE:CPB). Of these, DuPont has the highest yield at 4.0%, followed by Sempra Energy's 3.5%, whose dividend rose more than 13% per year over the past five years. Campbell Soup, Archer Daniels Midland and Xerox pay dividend yields of 3.2%, 2.6%, and 2.5%, respectively. Campbell Soup boasts a remarkably high ROE of 66.5%. DuPont's ROE is also high at 26%.

    Among the Fortune 500 firms is also a high yielder Frontier Communications (NASDAQ:FTR). The company has an elevated dividend yield due to poor stock performance amid lackluster financial results in recent periods and a weak balance sheet. In fact, the company slashed its dividend by 47% in the first quarter of 2012. Still, it pays a yield of 8.3% on a payout ratio of 51% of free cash flow. The current payout ratio is sustainable, and has declined to 46% of free cash flow in the previous quarter from 70% in the year-ago quarter. The stock is a viable income play.

    Furthermore, as of January 1, 2013, the aerospace and defense sector will be richer by two new women executives taking over the helms of two other Fortune 500 companies: General Dynamics (NYSE:GD) and Lockheed Martin (NYSE:LMT). Both these companies have had remarkable earnings and dividend growth in the past. Despite the fiscal tightening, their earnings outlooks remain solid. General Dynamics, whose dividend increased 12.7% per year over the past five years, currently yields 3.1%. Its competitor Lockheed Martin yields a lush 4.9% dividend, with a 5-year dividend growth averaging 23% per year over the past five years. The new CEO of Lockheed Martin, Marillyn Hewson, faces a challenge of sustaining a skyhigh ROE at 107%.

    Based on the documented studies, an increase in the number of female executives in the corporate bodies should lead to the affected companies' better financial performance in the future. Investors who want to reap benefits from the winning leadership of the few women running the world's largest corporation should invest in the dividend-yielders with a proven record of business success.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Dec 04 7:10 PM | Link | Comment!
  • Opportunities For High Dividend Yields In The U.K.

    Investors in pursuit of high dividend yields have plenty of reasons to focus on the U.K. equity market. Currently, on average, U.K. stocks are paying higher dividend yields than U.S. stocks. For example, the FTSE All-Share index is paying a dividend yield of 3.62%, compared to a yield of just 1.5%, on average, for the U.S. broad Russell 2000 index. Even large-cap U.S. stocks in the S&P 500 index are yielding a mere 2.1% on average. On the other hand, U.K. stocks are yielding much more than government bonds. For instance, the U.K. broad equity market's yield is 140% higher than the yield on the U.K. 10-year gilt. Obviously, all this should put UK dividend payers on the radar of the U.K. and global income investors.

    Still, income investors in the U.K. market have an opportunity to obtain even higher yields than the noted lucrative averages. There are several exchange-traded products and select high-quality stocks that offer distribution/dividend yields that can hardly be matched by investments of a comparable risk-return profile.

    For example, in general, a good place to look for safe high-yield UK-based dividend stocks is the S&P U.K. High Yield Dividend Aristocrats Index, which consists of 30 highest-yielding U.K. stocks within the S&P Europe Broad Market Index. The S&P U.K. High Yield Dividend Aristocrats Index balances high dividend yield with dividend sustainability and growth. It includes only those companies that have dividends covered by earnings, with a maximum yield of no more than 10%, and the history of dividend hikes for at least 10 consecutive years. Investors can purchase the entire index in a form of an exchange-traded fund (NYSEMKT:ETF), SPDR S&P U.K. Dividend Aristocrats ETF (LSE: UKDV). This ETF has an expense ratio of 0.3% per annum and boasts a distribution yield of 4.42%, with distributions made twice yearly.

    Another ETF that tracks attractive dividend-paying stocks in the U.K. is the iShares FTSE U.K. Dividend Plus ETF (LSE: IUKD). This ETF tracks performance of the FTSE U.K. Dividend+ Index, which consists of the 50 highest-yielding U.K. stocks within the universe of the FTSE 350 Index (measuring the performance of the 350 largest U.K.-listed stocks by market capitalization). Almost a third of the ETF's allocation is in the financial sector, followed by consumer services and industrials. The ETF has an expense ratio of 0.4% per annum and a distribution yield of 5.21%. The fund makes distributions quarterly. However, please note that while this ETF has outperformed the broader equity market this year, since inception in 2005 it has markedly underperformed the broader market.

    While ETF investing allows for diversification, investors can also focus on investing in individual dividend-paying stocks, especially those of high quality, with sustainable earnings power and dividend growth. For example, investors can choose from among the constituents of the aforementioned indices. Some of the recommended investments options are listed in the table below:

    Moreover, dividend investors can follow the advice of the analysts at investment bank Morgan Stanley, who recently made a special screen to identify the best U.K. dividend stocks for the next two years. Looking for stocks with a high-return potential, investment safety, and a prospect of dividend growth, Morgan Stanley's analysts selected the best U.K. dividend stocks based on a high yield and dividend growth over the next two years; payout ratio below 75%; market cap above £3 billion, strong balance sheets with a debt-to-equity ratio below 30%; and free cash flow yield above 5%. Their screen identified the following stocks as the best dividend investment opportunities:

    All of the aforementioned investments pay dividend yields in excess of the current rate of inflation, the average dividend yield on the broad stock market, and the benchmark government bonds. Moreover, all U.K. dividends are exempted from the UK withholding taxes. Therefore, the aforementioned dividend ETFs and stocks should be considered as attractive investments by prudent equity income investors.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Aug 28 2:36 AM | Link | Comment!
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