What are we looking for?
A while back, a reader approached me looking for some help in analyzing income stocks. My associate Allan Meyer and I thought we would take a closer look at Canadian dividend payers using our investment philosophy focused on safety and value.
The screen
We started with Canadian-listed equities with a market capitalization of $10-billion or more. (We will focus on those under $10-billion in a separate Number Cruncher.)
Some investors, particularly retirees, have a thirst for income. Allan and I like to get paid while we wait and dividends generally reflect safety and stability.
Yield is based on the current share price divided by the projected dividend payments over the next year. All securities listed yield 4 per cent or more.
Payout is the dividend payment divided by earnings. A lower number is preferred and implies the dividend is safer. A low number could also signal the ability for a future dividend increase, while a number over 100 could signal the potential for a dividend cut.
Price-to-earnings is the current share price divided by the earnings per share. It is a valuation metric; the lower the number, the better the value.
Earnings momentum is the change in annual earnings over the last quarter. A positive number indicates earnings are increasing, which also implies dividend safety and could hint at a potential future dividend bump. The opposite is true for a decrease.
Lastly, we looked at debt to equity. A smaller ratio indicates a company has lower levels of debt and can be viewed as a sign of safety. A number under 100 implies a company has enough equity to pay its debt obligations. Generally, we prefer companies under 150, but this varies across industries and sectors, as many other metrics do.
What did we find?
CIBC, Sunlife and Power Corp. look interesting as they have low payout ratios and debt levels, attractive value and positive earnings momentum.
Manulife's negative earnings momentum should be noted.
ETFs are an option for investors who are looking for income but prefer to diversify away individual security risk. BMO offers a Canadian dividend ETF (ZDV), while iShares offers a similar option (XDV).
Investors should contact an investment professional or conduct further research before buying any of the securities listed here.
Sean Pugliese, CFA, is an investment portfolio manager at Wickham Investment Counsel, helping individuals, families and other investors.