Banks, pipelines, banks, utilities, more banks - being a dividend investor in Canada can get a bit monotonous. For greater diversification, you need to look beyond Canada's borders.
Only by venturing into the U.S. market and abroad can you get exposure to some of the world's top consumer products, health care and technology companies - sectors in which Canada is woefully under-represented.
With that in mind, we asked Ian Riach, manager of the Bissett Multinational Growth Fund, to discuss some of his top dividend picks, focusing on those that are likely to increase their payouts.
When choosing stocks, Mr. Riach starts by screening for dividend-paying companies that generate at least 20 per cent of their revenue from outside their home country. He then ranks the companies based on dividend yield (the higher the better), payout ratio (the lower the better) and the number of dividend increases over the past five and 10 years (the higher the better).
"If a company has consistently increased its dividend over a number of years, has a decent yield and a low payout ratio, that, to me, indicates - and we've done some back-testing on this - that the dividend is sustainable, that they should keep paying it and they should keep growing it," he says.
If a stock passes the initial tests, Mr. Riach then digs into the company's fundamentals before adding it to his fund. Here are five companies that made the cut:
Johnson & Johnson
Yield: 3.6 per cent
Five-year annualized dividend growth: 10.9 per cent
Payout ratio: 43.4 per cent (percentage of trailing 12-month profit paid out as dividends)
Johnson & Johnson's stock has been battered by quality-control problems at several plants and recalls of more than 100 million bottles of over-the-counter medicines such as adult and children's Tylenol, Motrin, Benadryl and Zyrtec.
"This is a company that's had some challenges, there's no question," Mr. Riach says.
But J&J is still immensely profitable, has a triple-A credit rating, and its operating cash flow covers the dividend by about three times, leaving plenty of room for dividend hikes. What's more, because of the company's (likely temporary) problems, the stock is trading at less than 12 times estimated 2011 earnings
Yield: 2.9 per cent
Five-year annualized dividend growth: 13.7 per cent
Payout ratio: 46.6 per cent
Faced with a flat soft drink market in North America, PepsiCo has successfully turned to non-carbonated beverages and snack foods to drive growth, which is especially strong in emerging markets such as China and India.
Earlier this year, the company completed the acquisition of two its bottling companies, Pepsi Bottling Group and Pepsi Americas. The moves are expected to achieve $400-million (U.S.) in cost savings annually by 2012.
"Here's another company that has consistently increased its dividend," he says. "Their operating cash flow covers that dividend probably 2.5 to three times, so that dividend is safe in my mind and has the ability to grow."
Yield: 3 per cent
Five-year annualized dividend growth: 32 per cent
Payout ratio: 49.2 per cent
Whether you're a customer or an investor, you have to be impressed with the transformation of McDonald's over the past few years. While tweaking its menu with healthier items, rolling out McCafés and overhauling its stale advertising, the company also adopted a more shareholder-friendly attitude that includes juicy dividend hikes.
You know McDonald's is doing something right when Europe - the birthplace of haute cuisine - is one of its fastest-growing regions. But it's not like the stock market hasn't already noticed.
With the stock up more than 35 per cent in the past year and bumping near a record high, "valuation is starting to become a bit of an issue," Mr. Riach says.
Yield: 2.2 per cent
Five-year annualized dividend growth: 10.2 per cent
Payout ratio: 24.2 per cent
Everyone loves to slag Microsoft. It's lazy. It doesn't know how to innovate. It has weak growth prospects. But one thing it does have is lots and lots of cash: About $37-billion, or more than $4 a share, in cash and short-term investments as of June 30.
Now, investors are agitating to get some of that money back in the form of rising dividends. The software giant last hiked its dividend in 2008, but Mr. Riach said "significant" dividend increases could resume soon.
With the current dividend covered more than five times by operating cash flow, Microsoft could certainly afford a hike. And with a P/E of 10 times this year's earnings, "at this price I think it represents good value," he says.
Yield: 4.6 per cent
Five-year annualized dividend growth: 5.2 per cent
Payout ratio: 55.9 per cent
Like most big pharmaceutical companies, GlaxoSmithKline is grappling with patent expirations on some of its best-selling drugs and tighter regulation from the U.S. Food and Drug Administration, which may delay the development of new medicines.
"It's not like they don't have anything in the pipeline. In their vaccine areas, Glaxo is making some pretty big inroads there," he says. Anyone who got one of Glaxo's H1N1 shots knows that's true.
But while shareholders wait for the next blockbuster drug, the company spins off a 4.6-per-cent yield, has a clean balance sheet, and trades at just 11 times estimated 2010 earnings.