Craig McGee is a senior consultant at Morningstar Canada.
What are we looking for?
Dividend-paying Canadian stocks with predictable earnings, offering growth at a reasonable price.
This screen is a modification to the CPMS Canadian Predictable Growth model portfolio, which looks for stocks with good earnings value, strong reinvestment rates (earnings less dividends as a percentage of shareholders’ equity) and low levels of earnings variability.
Secondary importance is placed on low price-to-book ratios, growing earnings and earnings expectations, and price momentum.
For this modified screen, additional emphasis was placed on price-to-earnings ratios, expected yields must be greater than 1 per cent and no more than five stocks per sector were allowed.
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 did we find?
Using CPMS, I back-tested the strategy to apply the same rules-based approach beginning Dec. 31, 1991. A portfolio of up to 20 stocks was equally weighted and stocks would be held until they fell outside of the top 40 per cent, at which point they would be replaced with the next top-ranking stock available.
Over the full time period, the strategy generated an annualized total return of 16.4 per cent compared with 9.1 per cent for the S&P/TSX Composite Total Return Index. Over the past three years ended April 30, 2014, the strategy posted an annualized return of 15.1 per cent while the benchmark came in with 4.7 per cent.
As always, be sure to do further research before investing in any of the stocks shown here.
CPMS Canadian Predictable Growth model portfolio
Follow us on Twitter: