What are we looking for?
Today's screen kicks off a series similar to one we did on S&P 500 stocks over the last three weeks. In the previous series we looked first for the best income stocks, then growth stocks, and finally combined the two into one outperforming portfolio.
We'll do the same with Canadian equities, starting with dividend stocks. These are very popular with Globe Investor readers these days, but they don't always offer much in the way of capital gains when markets are strong. The combined portfolio may offer the best of both worlds. We'll get help on these screens from CPMS Morningstar.
More about CPMS
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.
More about today's screen
Today's screen looks for stocks:
- that have dividend yield greater than the bottom quarter of dividend-paying stocks (currently 1.3 per cent);
- that are growing dividends by at least 2 per cent a year over the last five years or are expected to grow dividends by at least 10 per cent year-over-year;
- dividend payout ratios of less than 80 per cent of forward earnings or 50 per cent of trailing cash flows in dividends;
It then ranks the stocks by:
- dividend yield;
- five-year dividend growth;
- expected dividend growth (forward versus trailing four quarters);
- cash flow growth;
- profitability as measured by return on equity.
What did we find out?
Jamie Hynes, senior consultant with CPMS, created a portfolio of the top 20 dividend stocks from the largest 250 stocks in Canada based on market float. No more than five stocks were allowed per sector and stocks were sold when they fell in rank below the 40th percentile of the 250-stock universe, decreased their dividend, or breached the dividend payout ratio minimums.
Going back to the end of 1991, the dividend portfolio has returned 15-per-cent annualized, versus 10 per cent for the S&P/TSX composite total return benchmark. Over the past year, the dividend portfolio is up 21.3 per cent, versus 17.2 per cent for the benchmark.
Volatility of the portfolio is also low compared with the benchmark and turnover is low as well, as the portfolio's methodology required just 10 buys and sells a year.
On the downside, this model usually lags in "up" markets, Mr. Hynes said. It beat the S&P/TSX composite benchmark in just five of 13 years when the benchmark was up, versus six for six when the market was down. Next week, we will focus on more aggressive growth stocks, which are much stronger in "up" markets.