What are we looking for?
To conclude our three-part series on Canadian income stocks, my associate Allan Meyer and I thought we would take a closer look at small-cap 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 $200-million to $999-million, sorted from highest to lowest.
A larger market capitalization can be viewed as a safety factor. Some investors – such as retirees, Mr. Meyer and myself – have a thirst for income.
As Mr. Meyer and I like to tell clients, "We like to get paid while we wait for capital appreciation and generally, dividends reflect safety and stability."
Here are the other screen criteria:
- Dividend yield is based on the current share price divided by the projected annual dividend payments. 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. It could also foreshadow a dividend bump, while a number over 100 could be a warning sign for a cut. We’ve capped the payout at 100.
- Price-to-earnings is the share price divided by the projected 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 means earnings are growing, a proxy for capital appreciation. The opposite is true for a negative number. All securities in our screen must have positive earnings momentum. Earnings increases could hint at future dividend bumps, and vice versa for decreases.
- Lastly, we looked at the debt-to-equity ratio. A smaller ratio indicates 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.
It is important to note that metrics and their implications can vary widely across industries and sectors.
What did we find?
Western Forest, Callidus Capital and Timbercreek Financial look interesting because of their high yields, positive earnings momentum and reasonable payouts and debt levels.
Debt levels on MCAN appear high but that's because the mortgages it issues are reported on balance sheet as a liability.
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.