S&P's Top Canadian Income Buys

08/05/2013 7:00 am EST

Focus: STOCKS

Investors wary of an overheating US stock market may find good portfolio proxies among cooler Canadian companies. Many Canadian companies trading in New York are considered undervalued fundamentally by S&P Capital IQ equity analysts, observes Isabelle Sender in S&P's MarketScope Advisor.

Several Canadian companies trading in American depositary shares (ADSs) are ranked 4- or 5-STARS (our two highest buy ratings) by S&P Capital IQ equity analysts.

All offer a dividend recently yielding more than 1.5%, and a five-year dividend growth rate of at least 2.6%, according to the stock screening tool on MarketScope Advisor.

Among top-ranked Canadian banks, dividends appear attractive to S&P Capital IQ.

The Toronto-Dominion Bank (TD) recently yielded 3.7%; Bank of Montreal (BMO), 4.7%; and The Bank of Nova Scotia (BNS), 4.2%, and the entities have been increasing dividends over the past five years at an average rate of 6.7%, 2.6%, and 5.1%, respectively.

S&P Capital IQ equity analyst Erik Oja says Canadian banks face many country-specific, as well as global, challenges: low interest rates, deleveraging Canadian consumers, frothy Canadian real-estate prices, and a sluggish US recovery.

Among consumer-discretionary sector Canadian ADSs are more modest dividend payers, but those that have grown dividends at a faster rate than banks.

The ADSs include auto-parts maker Magna International (MGA), which recently yielded 1.7% after growing dividends at an average rate of 19.3% over the last three years.

Meanwhile, publisher Thomson Reuters (TRI) has grown its dividends by an average 8.4% over the last five years and recently yielded 3.7%.

Quick-service restaurant chain Tim Hortons (THI) recently yielded 1.7%, but has boosted its dividends by 24.3% over the last five years on average.

Energy concern, Suncor Energy (SU), is the result of the 2009 merger with one of the largest energy companies in Canada, which was focused on Alberta's vast Athabasca oil sands, with complementary operations in refining and marketing.

The average five-year dividend growth rate for the combined entity stands at 23.5%, and it recently yielded 2.4%.

Canadian utility TransAlta (TAC) increased dividends more modestly over the last five years at 4.4%, but much like US-traded utilities, has seen its dividend yield rise as stock prices fell, resulting in higher ratios.

The independent power producer and wholesale-marketing company, which owns a portfolio of generation assets in Canada, the US, Mexico, and Australia yielded 7.9% recently.

Also a multinational concern, industrials-sector company Canadian National Railway (CNI), operates Canada's largest railroad, linking customers in Canada, the US, and Mexico through approximately 20,600 route miles.

The railroad increased its dividends over the last five years by 13.8% on average, and recently yielded 1.6%.

Foreign withholding taxes may reduce the dividends received from these investments; consult with your tax advisor for advice specific to your situation.

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