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What are we looking for?
Canadian stocks that offer good dividend yields but also attractive value.
How we did it
Craig McGee, senior consultant at CPMS Morningstar Canada, searched the CPMS database for Canadian stocks that offer a good blend of relatively low price-to-earnings ratios, price-to-cash-flow ratios and price-to-sales ratios.
In addition, each stock had to:
Offer a dividend yield of at least 3 per cent;
Rank in the top 40 per cent of the CPMS Canadian database on the above criteria.
Any stock for which analysts had reduced their earnings estimates over the past three months was ruled out. This criterion is intended to weed out firms that are cheap for a good reason.
More about Morningstar
Morningstar Inc. provides independent investment research in North America, Europe, Australia and Asia. Its research tool, Morningstar CPMS, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers. CPMS data cover more than 95 per cent of the investable North American stock market.
What we found
Mr. McGee back-tested the strategy assuming that an investor held equal dollar amounts of each stock until a stock fell below the 30-per-cent mark of the CPMS database, at which point it was replaced with the best ranking alternative that passed all of the above criteria.
Since Dec. 31, 1985, this strategy would have generated an annualized return of 13.5 per cent, versus 8.1 per cent for the S&P/TSX Total Return Index. Remember, though, that past results don't necessarily predict future success. Investors should do their own research before buying any of the stocks listed here.
Ian McGugan