Engineer takes a risk on smaller dividend-paying companies Nick Manley, 34 Engineer Shares in National Bank of Canada, Boston Pizza Royalties Fund, AutoCanada Inc., Chesswood Group Ltd., High Arctic Energy Services Inc., Home Capital Group Inc., and about 20 other Canadian companies. Being an engineer, Nick Manley initially thought technology companies would be good investments. But he has since decided it's better to invest in businesses that are more predictable and pay dividends. He writes about his investment philosophy and stocks at dividendblogger.com. It's great to document everything and go back to see what my thinking was around certain decisions. "I am primarily looking for stocks with low price-earnings ratios and a good dividend that has increased in recent years," Mr. Manley discloses. A company that increases dividends is sending a very positive signal that business is good. Mr. Manley believes in obtaining information from primary sources, notably quarterly and annual reports published by companies. He specifically checks that companies can cover their dividend out of earnings. One warning sign is "if cash flow or some other [non-standard] measure is used by management to justify the dividend." As there are only so many large Canadian companies and not all of them meet his criteria, he is willing to invest in smaller dividend-paying companies. While riskier, he diversifies into a number of companies in order to protect himself from losses. Mortgage firm Home Capital Group has been heavily sold short by hedge funds. But Mr. Manley doesn't agree that Canadian housing will collapse (without a major recession). Home Capital is "a good value with a price-earnings ratio of eight and dividend payout ratio of 15 per cent." I purchased AutoCanada at $6.30 in January, 2012, and am still holding with the shares up 350 per cent. At the time of purchase, the price-earnings ratio was five and the yield was 8 per cent. Early on, I invested in a number of high-yielding companies like AGF Management. [The experience] taught me more about financial statements, and pushed me to explore smaller companies with better valuations and more sustainable dividends. Investing in companies is the only way to create wealth. I would rather pay down debt such as a mortgage rather than invest in bonds earning inflation or less.