Craig McGee is a senior consultant at Morningstar Canada.
What we’re looking for
In today’s slow-growth and low-but-stable interest rate environment, investors who search out strong and established companies that have expected dividend growth could be rewarded as they get paid to wait.
I searched the CPMS Canadian and U.S. Dividend Growth model portfolios for 20 stocks that fit the theme. These models seek to buy profitable companies that are growing their dividends. The strategies also emphasize high dividend yields and cash flow while maintaining lower payout ratios.
Specifically, I found the 10 stocks from each Canadian and U.S. portfolio with the highest expected yields and displayed the following metrics along with them:
- dividend change over the next four quarters versus the trailing four quarters;
- dividend change over the trailing four quarters versus the prior four quarters;
- return on equity for the trailing four quarters;
- payout ratio using expected dividends as a percentage of the current year’s consensus earnings;
- five-year price beta – measured against the TSX composite for Canadian stocks and the S&P 500 for U.S. stocks (a figure less than one signals the stock is less volatile than the benchmark).
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
By combining the two portfolios and rebalancing each with a 50-per-cent weight every year, the model would have generated an annualized total return of 13.5 per cent since the start of 1994, while a combined benchmark (50 per cent TSX, 50 per cent S&P 500) would have posted a total return of 8.6 per cent. (All returns in Canadian dollars.) Over the past five years, the strategy would have returned 18.6 per cent versus the blended benchmark at 16.1 per cent.
Be sure to do further research before investing in any of the stocks shown here.