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Number Cruncher

'True yield' sharpens focus on returns Add to ...

What we’re looking for

Canadian dividend-growth stocks where the “true yield” is growing. We adjust the dividend yield so that it accounts for share buybacks (which decrease the number of shares outstanding, boosting the true yield) and stock issues (which increase the number of shares, diminishing the true yield). This provides a more accurate picture of how firms return capital to investors.

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What we found

This approach, explained by UBS Investment Research strategist George Vasic, subtracts the three-year compound annual growth rate of shares outstanding from the dividend yield. He considers it a complementary measure to the dividend yield, along with dividend growth, share count and payout ratio.

Non-financial stocks appear to be the preferred investment for people seeking attractive dividends and true yields as well as growth, Mr. Vasic says.

“Their combination of long-run growth with lower volatility seems an attractive combination, and they offer value in diversifying a portfolio from the financial and telecom/utility sectors that income-oriented investors tend to gravitate toward.

“Moreover, the non-financial sector currently offers the largest number that are net buyers of their shares, have decent dividend growth track records and moderate payout ratios.”

Mr. Vasic examined 37 non-financial stocks (20 of which appear here; see the full list online at tgam.ca/cruncher). and found payout ratios were less than 40 per cent for 23 of the companies, suggesting that the prospects for maintaining yield, dividend growth and buybacks were promising.

Telecoms and utilities have high dividend yields and have performed well recently because of strong dividend growth, “but their longer-run prospects are not as bright, due to broad-based share issuance and high payout ratios,” Mr. Vasic points out.

Seven of the nine stocks he looked at in this group had payout ratios exceeding 50 per cent, while dividend growth was relatively weak and inconsistent.

Financial stocks are gradually returning to the position that made them solid dividend growers, with buybacks being the norm. Still, the outlook for their earnings is clouded by risks related to the global banking sector.

Only five stocks in the TSX composite index have a dividend yield greater than 1.5 per cent, a true yield greater than 3 per cent, no increase in shares over the last three years, annualized dividend growth greater than 10 per cent over the last five years and a payout ratio less than 50 per cent, Mr. Vasic says. The companies are Rogers Communications, Jean Coutu, Tim Hortons, Metro and Canadian National Railway.

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