Growth, not yield, drives Leith Wheeler's dividend strategy

High payout ratios serve as a warning flag.

Michael Ryval 9 March, 2017 | 6:00PM

Understanding a company's fundamental attributes such as return on equity, free cash flow and earnings growth are key elements of the value-style process at Vancouver-based Leith Wheeler Investment Counsel Ltd. But in choosing dividend-paying stocks, while aiming for a total-return approach, the managers also need to understand how the business might develop over the next five years.

"Forecasting is fraught with issues. But we spend a lot of time talking to management, look closely at the assets and talk to people associated with the business," says Patrick Reddy, Canadian equity analyst and portfolio manager of Leith Wheeler Canadian Dividend. The $90-million fund has a 4-star Morningstar Rating for its risk-adjusted past returns in the Canadian Dividend and Income Equity category.

"We want to understand where the business is going over the next three to five years," says Reddy. "Since it's hard to forecast, we have our best-case scenario -- and our worst case. If something does go wrong, we ask ourselves, what's our margin of safety?"

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Bank of Nova Scotia65.00 CAD2.85
Canadian National Railway Co137.82 CAD1.34
Open Text Corp57.42 CAD0.16

About Author

Michael Ryval

Michael Ryval  Michael Ryval, a regular contributor to Morningstar, is a Toronto-based freelance writer who specializes in business and investing.

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