BCE  (TSX: BCE, NYSE: BCE)

Dividend Yield: 4.3%    Recent Price: C$62/US$48   Fair Value: C$71/US$53

BCE remains one of our best ideas for new money, in addition to holding the top position in our Dividend Champions portfolio – a position that is well-deserved given its outstanding history as a profitable operator. In fact, the company has a 60-year track record of growing dividends and has delivered growth of 7% per year over the past five years.

BCE holds a dominant position in the Canadian telecommunications industry, which limits its opportunities for further rapid growth. Even so, the company continues to find ways to generate growth: the fast-growing mobile data and high-speed Internet businesses provide organic growth, while selective and targeted acquisitions such as the 2014 Bell Aliant take-out and the proposed acquisition of Manitoba Telecom Services continue to expand the business.

Second-quarter results were solid, the stock’s valuation remains reasonable and the yield is attractive at 4.3%. Expect the relatively safe dividend to continue growing 5% per year. In a low interest rate environment, this is an ideal stock to own. We estimate the fair value of the stock at C$71 or US$53.

K-Bro Linen Inc.  (TSX: KBL, OTC: KBRLF)

Dividend Yield: 2.8%    Recent Price: C$44/US$34   Fair Value: C$47/US$35

K-Bro Linen recently reported below-par results for the first quarter of 2016, but some of the positive aspects in the report were masked by a large increase in charges related to the completion of a new production plant in Regina.

While the costs associated with the start of operations at the Regina plant and servicing of the new 3sHeatlh contracts have depressed profits over the past two quarters, the company’s positives should support profitability for the balance of the year as profit margins return to normal.

K-Bro’s balance sheet is in excellent shape with a debt-to-capital ratio of only 5%. Cash flow from operations is abundant, increasing by 60% in the latest quarter compared to last year. The dividend is well covered with a pay-out ratio of only 45% of distributable cash flow.

The company has an excellent long-term track record of stable and profitable business operations. We look forward to a strong recovery in profit growth in 2016 followed by solid growth in 2017 and 2018, with consensus estimates now indicating 60% growth in earnings per share between 2015 and 2018.

This is a stable if unexciting business, and the stock is very suitable for investors who value stability and few surprises. Investors should use price weakness to buy K-Bro below our fair value estimate of C$47 or US$35.

Inter Pipeline  (TSX: IPL, OTC: IPPLF)

Dividend Yield: 5.7%    Recent Price: C$27/US$21   Fair Value: C$31/US$23

Inter Pipeline is one of the smaller regional Canadian pipeline operators that seem to be able to maneuver their way through the regulatory and environmental minefields in a consistent and profitable way. The company helps move almost 4 million barrels of oil per day out of landlocked areas.

The business’ profits are mostly derived from cost-of-service or fee-based contracts, which are generally not subject to commodity risk and provide for a relatively stable, low-risk income stream. The company has built up an enviable track record of profitable growth over time and increased its dividend 10% per year over the past 10 years.

The balance sheet is sound, with debt to capital currently at a manageable 54% and an investment grade rating from S&P. Cash flow remains strong, with operating cash flow conversion over 40% of revenue and free cash flow (operating cash flow minus sustaining capital expenditures) readily covering the dividend payments.

The company’s second quarter results were strong, confirming again our positive outlook for the business. The main attraction from a valuation perspective is the current 5.7% dividend yield, coupled with reasonable growth over the next two years. We consider the dividend safe given the sound balance sheet, strong cash flow generation and reasonable pay-out ratio.