What are we looking for?
U.S. dividend-growth companies in sectors that are under-represented in Canada.
The screen
Canadian equity markets are disproportionally weighted in our country's largest sectors: banks/financials, energy and basic materials. As a result, the typical Canadian investor's portfolio may not represent all sectors appropriately, leading to some potential missed opportunity. This week, I look south of the border for some conservative stock picks. Specifically, I ranked stocks based on the best combination of the following factors:
– dividend yield;
– dividend growth over the most recent five-year period;
– earnings per share growth over the most recent five-year period;
– cash flow to debt, a metric that indicates the ability of a company to cover its debt with current annual cash flow;
– five-year historical beta.
Recall that stocks with lower beta are historically less sensitive to general market movements than high beta stocks. A beta of one would indicate a stock that moves in line with the market. A negative beta indicates that the stock has historically moved in the opposite direction of the market, which can be a desirable trait especially when markets are trending downward.
Qualifying stocks have a market cap of $4-billion (U.S.) or above, and a dividend payout ratio of less than 60 per cent. Financials, energy and basic materials companies were excluded from this screen.
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. With more than 110 equity and credit analysts, Morningstar has one of the largest independent institutional equity research teams in the world.
What we found
I used CPMS to back-test this strategy from December, 1993, to February, 2015. During this process, 10 stocks were purchased and equally weighted with a maximum of three stocks per qualifying sector. Stocks would be sold if they fell outside the top 25 per cent of the database. Over this period the strategy produced an annualized return of 14.8 per cent while the S&P 500 total return index returned 9.5 per cent. The top 10 qualifying stocks today are listed here along with their sectors.
Investors are always advised to conduct independent research before purchasing the stocks listed.
Ian Tam, CFA, is a relationship manager for CPMS at Morningstar Research Inc.