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Number Cruncher

'True' yield unearths worthwhile dividends Add to ...

What are we looking for?

After the shock Manulife handed dividend investors on Thursday, Number Cruncher decided to take a look at how some of the other marquee names in the dividend-paying land have been faring of late.

We've identified a number of means for unearthing dividend-paying stocks that are worth revisiting, but one of the most compelling screens came our way via George Vasic, strategist at UBS Securities Canada Inc. Last summer Mr. Vasic showed us how to look past just yield to "true" yield to find worthwhile opportunities - in this case, 11 stocks that share some very hard-to-come-by characteristics.

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What is true yield?

There are two ways a company returns capital to shareholders: dividends and share buybacks. True yield measures the dividend yield, adjusted for any growth or shrinkage in the number of shares outstanding.

A company that buys back a lot of shares will have a higher true yield, while one that issues more stock and dilutes its shares outstanding will have a lower true yield, all other things being equal.

Mr. Vasic defines true yield as dividend yield minus the three-year compound annual growth rate of shares outstanding.

How the screen works

True yield is best used as a complementary measure to dividend yield, not as a substitute, Mr. Vasic says. "We believe the best information is obtained by looking at dividend yield, dividend growth, payout ratio and share count in tandem," he said in a note.

Last August, Mr. Vasic screened for companies that had a dividend yield greater than 1.5 per cent, a true yield greater than 3 per cent, no share dilution in the past three years, five consecutive dividend increases with an average annual growth rate of more than 10 per cent and a payout ratio (dividends as a percentage of profit) of less than 50 per cent.

Fulfilling all of those criteria wasn't easy. On the S&P/TSX composite index (excluding income trusts), only 11 companies made the cut. Most were financials, but you'll also find a railway, oil and gas producer, commercial printer, specialty television operator and a methanol producer.

We'll be talking to Mr. Vasic soon to update his "true" yield numbers and re-run the screen.

In the meantime, you can see that despite how much pressure these stocks have been under, they have been able to maintain their payments. In the case of Canadian National Railway Co., it actually managed to raise its quarterly dividend rate in January to 25.25 cents a share from 23 cents.

With a file from reporter John Heinzl

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