What are we looking for?
With oil prices sliding and increasing concern about a weakening economy, I wanted to highlight Canadian dividend-paying stocks with increasing expectations and reasonable payout ratios.
Specifically, I screened the CPMS Canadian database for the top 15 stocks from the S&P/TSX composite index with the following metrics:
– Positive expected dividend yield;
– Forward and trailing payout ratios less than 100 per cent based on operating earnings;
– Positive expected year-over-year earnings growth;
– Consensus earnings revisions over the past 90 days – cannot be negative;
– Forward and trailing payout ratios less than 100 per cent based on operating cash flow;
– Positive expected year-over-year cash flow growth;
– Consensus cash flow revisions over the past 90 days – cannot be negative.
Stocks are ranked by expected yield.
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
To test the strategy, I used CPMS to back-test starting Oct. 31, 1998, and selected the top 15 ranking stocks, equally weighted. Each quarter, the top 15 qualifying stocks were reselected. By following this strategy, it would have posted an annualized total return of 12.2 per cent while the S&P/TSX composite total return index came in at 8 per cent annualized over the same period.
Over the past year, the model generated a total return of 12.4 per cent, slightly underperforming the index, which came in at 13.3 per cent.
As usual, investors are advised to do their own research before investing in any of the stocks shown here.
Craig McGee is a senior institutional account manager of global equity and market data sales at Morningstar Research Inc.