2023 stocks: Top dividend picks from Bay Street money managers

From war raging in Ukraine, to central banks launching salvos of rate hikes against inflation, 2022 was a battlefield for investors where certainty was in short supply.

With growing consensus on some manner of recession, simmering geopolitical tensions, and COVID-19 risk set to push into another year, 2023 may be the time to add dividend stocks to your portfolio. But with so much potential chaos on the table, which companies are best positioned to offer a steady stream of income, or even grow their payouts?

Yahoo Finance Canada reached out to four Bay Street money managers to find out where they would invest to deliver market-beating returns this year.

Bank of Montreal (BMO.TO)(BMO)

Canadian banks are a go-to for dividend-focused investors who find the stability and scale of a Schedule 1 financial institution help them sleep at night.

Tim Johal, vice-president and portfolio manager of Mackenzie Investments' Canadian Dividend Fund, sees the Bank of Montreal (BMO) outperforming its peer group of big banks this year.

He points to strong profits from BMO's U.S. banking segment, where the bank intends to expand its footprint through a US$16.3 billion deal to buy Bank of the West. The transaction is expected to close in the first quarter of 2023.

At the same time, Johal says investors have been "too pessimistic" in assessing BMO's ability to weather a Canadian real estate correction.

"While investors have concerns about a downturn in the Canadian housing market and potential losses in the bank's residential mortgage portfolio, we believe these risks remain manageable due to continued low unemployment, high levels of home equity, even with the recent retreat in home prices, and BMO's history of strong risk management," he said.

Annual dividend yield: 4.63%

Fund holding: Yes

Personal holding: No

Calian Group (CGY.TO)

Ottawa-based Calian Group may not be a household name, but the IT solutions and training company is a stock to watch, according to Michael Simpson, portfolio manager at NCM Investments.

Calian's obscurity may be due to the complex task of explaining the company's work across a vast array of industries, from defence, to health and education.

In its latest quarter, Calian says it booked record revenue, moving the company closer to its goal of becoming a billion-dollar revenue generator. Also key for investors is the fact that the stock was largely spared from the tech sector carnage that saw shares of companies like Canadian e-commerce giant Shopify (SHOP.TO)(SHOP) plunge last year and remain under pressure.

"We anticipate further dividend increases. Calian has a strong, robust backlog. They're shifting to more capital-light businesses. So that should lower capital expenditure requirements," Simpson said. "Lastly, Calian has a strong and experienced management team."

Annual dividend yield: 1.69%

Fund holding: Yes

Personal holding: No

Open Text (OTEX.TO)(OTEX)

Sticking with the technology sector, shares of Waterloo-based Open Text have not held up nearly as well as Calian's stock in 2022. Robert Spafford, vice-president and portfolio manager at Cidel Asset Management, says the recent drop presents a "wonderful opportunity" to own the software provider.

In its latest quarter, Open Text says it achieved record revenue, while booking a significant one-time loss related to its planned acquisition of British software and technology company Micro Focus.

Spafford sees the deal adding roughly 60 per cent to the company's adjusted earnings before interest, taxes, depreciation and amortization (EBITDA). The transaction is expected to close in the first quarter of 2023. He feels investors shouldn't bristle at the debt Open Text will be adding to its balance sheet to fund the acquisition.

"The combined entity will generate significant free cash flow that will be used to rapidly reduce the debt," Spafford said. "We do not think that the acquisition will preclude Open Text from continuing to raise the dividend. As tangible proof of its high free cash flow margin and acquisition-driven business model, Open Text has grown its dividend on average 15 per cent annually over the past decade."

Spafford also notes "significant" insider buying since the company announced the Micro Focus deal.

Annual dividend yield: 3.26%

Fund holding: Yes

Personal holding: Yes

Canadian Pacific Railway (CP.TO)(CP)

Like the big banks, Canada's railways are a classic choice for dividend-hungry investors. For Irene Fernando, vice-president and senior portfolio manager of North American equities at RBC Global Asset Management, CP Rail is the one to go with.

She says strong operations and M&A upside make Calgary-based CP the most interesting story in North America's rail industry. The company is awaiting approval to acquire Kansas City Southern in a deal that would expand its network into all three North American countries.

Fernando says she's confident in management's ability to integrate the railways, and navigate challenges if an economic slowdown weighs on shipping demand.

Annual dividend yield: 0.74%

Fund holding: Yes

Personal holding: No

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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