Introducing the 2006 Canadian dividend stock all-star team.
If you've sworn off income trusts, these elite stocks are your new best friends. If you're worried about a stock market correction, these stocks are a way to play defence. They're also a great place to start your research if you're simply looking for sturdy names you can buy and hold for a few decades.
All-star teams are all about celebrating the best of the best.
In this case, the Portfolio Strategy column asked Thomson Financial analyst Avita Sukhram to sift through all the stocks listed on the Toronto Stock Exchange to come up with a list of the highest-quality dividend payers. The result: 23 stocks, including six banks, four insurers, a grocery chain, a miner, a couple of energy companies and a cable company.
Some of these stocks you know well. Take Bank of Nova Scotia, for example. Its dividend has risen five times in the past five years, and there's a solid margin of safety because the bank pays out a very manageable percentage of its earnings as dividends. Investors can also take comfort from the fact that Scotiabank has posted solid earnings growth in the past five years.
There are some lesser-known names on the all-star team as well. One of them is Toromont Industries, which manufactures refrigeration equipment and operates Caterpillar heavy equipment dealerships. Toromont has jacked up its dividend five times in the past years, and it pays out less of its earnings as dividends than a lot of its competitors.
It's a great time to look hard at dividend stocks, even if many aren't exactly bargain-priced right now. Interest rates are expected to fall in the year ahead, which is positive for all income-producing investments.
With the income trust market struggling to come to grips with a federal government crackdown on the sector, dividend stocks stand out as an obvious alternative.
And if the stock market were to weaken next year, not an unlikely prospect with a fourth successive great year just about in the books, dividend stocks stand a good chance of escaping the worst effects.
Financial stocks dominate the all-star dividend team, taking up 13 spots if you include Power Financial, a holding company with interests in the mutual find and investment advice firm Investors Group and insurer Great-West Lifeco (both of those companies are dividend all stars in their own right).
This shouldn't be a surprise because financial stocks are the true foundation of the Canadian stock market, not the energy stocks and mining stocks that have been so successful lately.
What may surprise you is the makeup of the financial stocks on the all-star team.
For example, Toronto-Dominion Bank came up just short of making the list because it has increased its dividend just a bit less than the required threshold. TD has a lower payout ratio than most of its competition, which means it has the room to rev up its dividends any time it wants to.
Canadian Western Bank did make the list, though just barely because its dividend yield is a mere 1.3 per cent.
On the plus side, this Edmonton-based regional bank has raised its dividend three times in the past five years for an average increase over any four-quarter period of 23 per cent. Very impressive. The closest big bank is National Bank of Canada, which has averaged 21-per-cent dividend growth over the past five years.
The four insurers on the list are Great-West Lifeco, Industrial Alliance, Manulife Financial and Sun Life Financial, none of which offers outstandingly high yields.
Instead, they offer frequent dividend increases — five in the past five years for all but Industrial Alliance, which has four increases — and the safety of solid payout ratios.
Many resource and energy companies pay a dividend, but it's typically a vestigial thing that offers mere pennies.
One exception is Teck Cominco, a miner of zinc, copper, gold and coal that offers a comparatively big dividend yielding 2.3 per cent. Teck has increased its semi-annual dividend twice in the past five years and its payout ratio is a low 18 per cent. This suggests the company has a decent cushion should metal prices come off their recent highs.
The energy stock on the all-star team isn't a blue-chip stalwart like Imperial Oil or an analyst's favourite like Suncor Energy. Both of these companies offer tiny dividend yields in comparison to Husky Energy, which has pumped through three dividend increases in the past five years and now yields about 2.7 per cent.
The other energy company on the dividend stock all-star team is Ensign Energy Services, which offers a comparatively low yield of 1.7 per cent.
What puts Ensign among the dividend elite is its habit of raising its dividend regularly and by a substantial amount.
Earlier this month, for example, the firm said it would increase its quarterly payout by 7 per cent to 8 cents.
Still, investors should remember the standard warning when looking at dividend-paying stocks that are tied to energy or metal prices: If commodity prices fall, the dividend is vulnerable. Call it the Abitibi-Consolidated rule, named for a pulp and paper giant that has suspended its dividend because of tough times in the industry.
Just because a stock makes the dividend all-star team doesn't mean it's an automatic buy right now. As income trusts have fallen this month, blue-chip dividend stocks have moved up as investors migrate to them as a source of income. There are a couple of apparent bargains on the team, however.
One is Loblaw Cos. Ltd., the grocery and retailing giant that has slumped so badly of late that its share price is about 7 per cent lower than it was five years ago.
From a dividend point of view, Loblaw remains an all-star. Its dividend rose four times in the past five years and the average year-over-year increase was a very respectable 18 per cent.
Today, with its share price depressed, Loblaw's 1.8-per-cent dividend yield represents a juicier payout than shareholders have seen this decade.
Shaw Communications, with an excellent record of dividend growth in the past five years, has seen its share price soar by about 40 per cent this year.
Still, the stock is only up a total 15 per cent in the past five years. Seekers of cheap dividend stocks may also want to check out Sun Life, which has logged an average share price gain of 6.6 per cent in the past five year, less than the other insurers on the dividend all-star team.
Owning a dividend all-star is a long-term proposition, so don't measure the success of your investment in these stocks over a one-year span.
Companies that are strong enough to regularly increase their dividends will appreciate in price over the long term, and they deliver an ever-growing yield on your initial investment. This is called total-return investing and it's a prime objective in big-league investing.
