What are we looking for?
These are treacherous times for investors. The budget impasse in Washington and the frightening prospect of a U.S. debt default has intensified market anxiety at a time when it was already running high over the inevitable tapering of the Federal Reserve’s extraordinary stimulus measures.
It could be prudent to scale back risk and adopt a more conservative approach when searching for stocks. With help on that, we’ve enlisted our good friend Craig McGee, senior consultant at CPMS Morningstar Canada, for a strategy that focuses on blue-chip dividend-paying companies with less volatile prices and earnings.
More on our screen
Mr. McGee narrowed his search by focusing on the largest 200 equities in Canada, which in itself should provide a more stable basket of stocks. Then, companies were ranked based on several criteria, including: trailing price-to-earnings, price-to-book ratio, earnings stability, expected dividend yield, and analysts’ revisions in their earnings estimates for the coming year (not shown on table). It also takes into consideration beta over the past year. Beta is the tendency of a security’s returns to respond to swings in the market; the lower the number, the less volatile it is relative to the bigger picture.
The 20 top-ranking stocks made our screen. Historically, this strategy has paid off. Mr. McGee ran a back-test simulation dating to 1985. The strategy generated an annualized total return of 13.2 per cent, beating the 8.2-per-cent return of the S&P/TSX Composite Total Return Index.
What we found
Canada’s big banks appear prominently on this list, but many sectors are well represented. One of the lesser-known names is Davis + Henderson, a former income trust that converted to a corporation in 2011 and currently has a dividend yield close to 5 per cent. The company has grown from being a cheque printer into being a diversified financial services technology company. It recently acquired a U.S.-based provider of banking technology that tripled its U.S. customer base.
Interestingly, Davis + Henderson has become quite prominent on globeinvestor.com over the past couple of months. In a recent Yield Hog column, Anil Tahiliani, portfolio manager with McLean & Partners Wealth Management, identified it as a stock he likes in the current interest rate environment. It also made two of our recent Number Cruncher screens: One that look at stocks offering good dividend yields and attractive value, and another that looked for companies with earnings momentum. And on BNN Market Call, it was a recent stock pick of Morgan Meighen’s Michael Smedley.
Don’t take this as an endorsement of this, or any, stock on our list. This screen only aims to identify investment ideas that would require further research.