Disclosure: An earlier version did not disclose the author's position in Fortis Inc.
What are we looking for?
A Dogs-of-the-Dow-like strategy for Canadian stocks.
More about today's screen
Investors who follow the Dogs of the Dow strategy buy the top-yielding stocks on the Dow Jones industrial average once per year. (A high yield can be a sign that a stock is unloved and must offer a larger payout to woo investors.) Historically, this strategy has outperformed the Dow, although that hasn't been the case in recent years.
Morningstar CPMS helped us adapt the strategy for Canada.
CPMS is an equity research and portfolio analysis firm owned by Morningstar Canada. It maintains a database of about 680 of the largest and more liquid Canadian stocks, plus another 2,100 U.S. stocks, and spends a lot of time adjusting for unusual accounting items in each company's quarterly results to make sure screens can perform correctly.
Jamie Hynes, CPMS senior consultant, first decided to look for stocks in the S&P/TSX composite index that have higher quality or safer dividends, as well as high yields. He screened for high-yield stocks that have increased dividends over the last year or that have a low payout ratio (expected dividends per share as a percentage of expected earnings per share).
Payout must be less than 41 per cent or dividends must have grown in the last year. Regardless, payout must be less than 100 per cent.
Mr. Hynes created a portfolio of 20 stocks that is annually reselected every year on March 31. He also allowed no more than five stocks per sector and he excluded trusts.
What did we find?
Mr. Hynes found out that the strategy beat the S&P/TSX composite total return benchmark index by 6 per cent annualized over the past 20 years. In other words, the portfolio returned 15.7 per cent annually, versus 9.7 per cent for the benchmark.
In recent years, it hasn't kept up with the benchmark because of its low exposure to commodities, but it still has outperformed over the long term.
"It beats the TSX in all four years the TSX was down, but can have a hard time keeping up when the TSX is up [it beat the TSX in nine of 16 years when the TSX is up]" Mr. Hynes said.
Disclosure: I own shares of Fortis Inc.