What are we looking for?
Canadian stocks that combine good dividends and high quality earnings.
Craig McGee, senior consultant at Morningstar Canada, has helped us out over the past few weeks with looks at several of Morningstar’s proprietary stock indexes. Today we look at the Morningstar Canada Dividend Target 30 Index.
How we did it
The index begins with the 100 most liquid Canadian stocks that have expected yields above 1 per cent. It then hunts for the companies with the strongest combinations of high dividend yields, high cash-flow-to-debt ratios, strong growth in earnings over the past five years, good returns on equity and positive revisions to earnings estimates over the past 90 days.
While the index contains 30 stocks, space limitations keep our list in the accompanying table to the top 20 names.
More about Morningstar
Morningstar Inc. provides independent investment research in North America, Europe, Australia and Asia. Its investment 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.
What did we find?
Mr. McGee examined how a hypothetical investor who constructed a portfolio based on this strategy, beginning on Dec. 31, 1993, would have fared. He assumed that the investor would have refreshed the portfolio every quarter and sold when a stock’s rank fell into the bottom quarter of the 100-stock universe.
This dividend lover would have enjoyed an annualized return of 14.3 per cent, beating the 8.1 per cent result from the S&P/TSX Composite Total Return Index over the same period.
Investing in high-quality dividend stocks has also been a stellar strategy over the past five years, producing a 4.6 per cent annualized return, versus 0.7 per cent for the index.
Remember, though, that there’s no guarantee that past patterns will repeat themselves. As always, you should do your own research before buying any of the stocks listed here.
Morningstar Canadian Dividend Target 30 Index (The Top 20)
|Bank of Montreal||BMO-T||4.8%||B+|
|Bank of Nova Scotia||BNS-T||4.1%||C+|
|Baytex Energy Corp.||BTE-T||5.9%||B-|
|Canadian Oil Sands Ltd.||COS-T||7.0%||B+|
|Cdn. Imperial Bank||CM-T||4.7%||C+|
|Crescent Pt Energy Corp.||CPG-T||7.6%||A-|
|Great West Lifeco||GWO-T||5.3%||B-|
Grades are relative to the 100 stocks in the selection universe; A = good; E = poor. Source: Morningstar Canada
|Company||Symbol||Expected Yield||CF/Debt||5yr EPS Growth||ROE||EPS Estimate Revision 90d|
|Bank of Montreal||BMO-T||4.8%||B+||C-||C+||C+|
|Bank of Nova Scotia||BNS-T||4.1%||C+||C+||B-||C+|
|Baytex Energy Corp.||BTE-T||5.9%||B-||C-||C+||B-|
|Canadian Oil Sands Ltd.||COS-T||7.0%||B+||D-||A-||B-|
|Cdn. Imperial Bank||CM-T||4.7%||C+||C-||A-||C+|
|Crescent Pt Energy Corp.||CPG-T||7.6%||A-||C-||E+||C-|
|Great West Lifeco||GWO-T||5.3%||B-||D+||C+||C+|
|IGM Financial Inc.||IGM-T||5.4%||C+||C-||B-||B-|
|Magna Intl. Inc.||MG-T||2.3%||A+||A-||C+||D+|
|Poseidon Concepts Corp.||PSN-T||30.8%||A+||A-||A+||E-|
|Power Financial Corp.||PWF-T||5.3%||B-||D+||C+||C+|
|Royal Bank of Canada||RY-T||4.1%||B+||C+||B+||C+|
|Shoppers Drug Mart Corp.||SC-T||2.5%||A+||C+||C+||C-|