What we are looking for?
Mid-cap companies that generally fall outside of an investor's spotlight.
The screen
Although the mid-cap space is about three times the size of the large-cap S&P/TSX 60, solid companies such as Cineplex do not usually receive the same level of attention as a name such as Loblaw. This strategy is designed to find growing companies that have a history of increasing their dividends that are sustainable. With a low interest-rate environment that is not looking to change any time soon, investors are seeking ways to provide a comfortable income stream.
We firmly believe in investing in dividend-paying companies that have a history of sustainable dividend growth. This provides protection from inflation and added support for the price of the underlying shares. Our criteria, as follows, are:
- TSX-listed stocks with a market float between $450-million to $4-billion;
- Dividend yield of at least 1 per cent;
- Five-year annualized dividend growth of at least 3 per cent;
- Annual cash flow momentum (percentage change over previous year) of at least 5 per cent;
- Trailing return on equity (ROE) of at least 5 per cent;
- Standard deviation of five-year ROE of less than 7 per cent (signalling lower volatility);
- Short interest of less than 6 per cent (relative lack of interest by short-sellers is a good indication that shares are not overbought);
- Dividend payout as a percentage of cash flow is less than 60 per cent.
More about the Wyndham Group
The Wyndham Group of Raymond James is a wealth-management group providing comprehensive financial planning and investment management services to health professionals, business owners and their families. Client portfolios are managed on a discretionary basis.
What we found
The screen resulted in 12 companies that average a 3.46-per-cent dividend yield. Looking at the portfolio over all, this group has been increasing their dividends by an average of more than 10 per cent a year over the past five years. The average annual cash flow momentum for the group is 25.4 per cent while trailing ROE have been increasing by 15 per cent. All this while current-year payout as a percentage of trailing cash flow averaged roughly 15 per cent for the group.
As always, investors are encouraged to conduct their own research before investing in any of the investments discussed here.
Rob Pollard, CIM, FCSI, is the portfolio manager of the Wyndham Group at Raymond James Ltd.