In building a global portfolio of dividend-paying stocks, Darren McKiernan, manager of Mackenzie Global Dividend, focuses on companies that are able to increase their dividend payments and maintain their payout ratios, regardless of where interest rates are headed.
Expecting an interest-rate hike before too long by the U.S. Federal Reserve, McKiernan has been avoiding companies that are highly sensitive to rate increases. "We think that investors who have just purchased companies like utilities, infrastructure assets or airports, simply because they've got a 4% or 5% yield, are going to be impacted (when interest rates go up)," says McKiernan, a senior vice-president and portfolio manager at Mackenzie Investments.
Nor is McKiernan influenced by market-wide comparisons of the dividend yields and payout ratios of Canadian stocks versus foreign stocks. This is like "comparing apples to oranges," he says.
McKiernan believes it is much more appropriate to compare the yields of Canadian and non-Canadian companies that are in the same sectors. In financial services, for instance, he'll look at how foreign banks compare to domestic players such as the Canadian market leader 
Royal Bank of Canada (RY), "a great franchise, a strong company with a fantastic footprint in North America."
When comparing Royal Bank to HSBC (HSBC), one of the holdings in the Mackenzie fund, "HSBC is one of the few global franchises, with a 6.5% dividend yield, compared to the Royal Bank's 4.5% dividend yield. That to me, the global investor, is a more apt comparison than say the (S&P/TSX Composite Index) to the MSCI World Index."
The largest position in the fund is Motorola Solutions Inc. (MSI), a communications-technology provider for firefighters, police officers and other emergency personnel. McKiernan says Motorola is a leading company in its field with very stable and very predictable cash flow.
"It has over 60% market share around the world," says McKiernan, "in a business that's hard to get into. They're paying out 30% of their cash flow in the form of dividends, with a 2% dividend yield, so not super high," but the focus is on the long-term potential. He thinks Motorola's cash flow will grow significantly over time, along with the actual dividend payout.
McKiernan says free cash flow is essential when it comes to a company's ability to pay dividends. "That, and a consistent track record of not just paying a dividend," says McKiernan, "but growing a dividend, year over year, decade over decade in some cases." Less favourable businesses can be adversely affected by cyclical factors and subsequently reduce their dividend payments.
Consumer staples is one of McKiernan's favourite sectors in which to search for companies that meet his stock-selection criteria. These companies tend to have fairly predictable earnings and be resilient to adverse market conditions. "Typically they offer really good cash flow and dividend payments," says McKiernan. "I would prefer to own a high-quality consumer-staple business with a 3.5% yield than a no-growth utility company with 4%, because you don't know what the regulatory environment is going to look like in two to three years."
The current 55% U.S. weighting in Mackenzie Global Dividend is fairly typical. McKiernan says the U.S. market, the world's largest in terms of market capitalization, has the broadest range of investment opportunities.
Elsewhere, the economic slowdown in China has been felt by companies held in the Mackenzie fund that do business there, says McKiernan. "But by no means are they worried about the long-term health of their business in the region. If anything, they are looking to reinforce their competitive position. And their dividends are most certainly not dependent on whether China's GDP grows at 6% or 3%."
Though dividends paid by foreign companies are ineligible for the federal dividend tax credit, McKiernan doesn't consider that to be much of a disadvantage. "The diversification benefits of investing globally in different currencies and in industries that you can't get access to in Canada, far outweighs the dividend tax-credit benefits." He believes most Canadian investors are overweight in Canada, especially since the global financial crisis.
The Canadian market is a "peculiar beast" because of its high concentration in natural resources and financial services, says McKiernan. It's prudent, he adds, for Canadian investors to diversify into foreign equity markets to improve their risk-adjusted returns.
