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WHAT ARE WE LOOKING FOR?
With the volatility in the Canadian market these days, it's nice to know that you can still have income spewing from dividend-paying stocks.
While financials obviously dominate the dividend growers, you might wonder whether a broad-based portfolio can be constructed that would somewhat resemble the S&P/TSX composite index. In other words, whether you can have your cake and eat it too.
BUILDING A MARKET-MIMICKING PORTFOLIO
The answer can now be “yes,” thanks to the emergence of dividend growers in the energy sector, UBS Securities Canada strategist George Vasic said this week in his latest report on a 12-stock portfolio of dividend growers.
The dozen stocks can't precisely resemble the market, he said. The availability of dividend growers leads to a “higher relative exposure in energy and financials, notably less in materials, and roughly neutral for the rest,” he added.
The conventional calculation for dividend yield is to take the amount of dividends paid per share over a year, and divide that by the stock price.
Mr. Vasic's approach, however, is to fill each sector in his portfolio with UBS “buy”-rated stocks that have the highest true yields until they have reached their approximate TSX weight.
True yield is the dividend yield adjusted for the growth in shares outstanding. Mr. Vasic defines true yield as dividend yield minus the three-year compound annual growth rate of shares outstanding.
A company that buys back a lot of shares will have a higher true yield, while one that dilutes its shares outstanding will have a lower true yield.
WHAT STOCKS MAKE IT?
“The largest challenge was in materials, where Methanex Corp. was the only dividend grower, and so the sector is less than half its 19 per cent in the TSX, and without golds or fertilizers,” he said.
On the other hand, several energy stocks have established five-year dividend-growth records, and so are slightly overweight (33 per cent versus 30 per cent in the TSX), as are the financials (33 per cent versus 27 per cent), he added.
His list of energy stocks includes EnCana Corp., Husky Energy Inc., Petro-Canada, and Talisman Energy Inc. The financials include Bank of Nova Scotia, Manulife Financial Corp., Royal Bank of Canada and Toronto-Dominion Bank.
The list is then completed with the three highest true yields among dividend growers in “other” categories, which account for one-quarter of the S&P/TSX, and cover seven sectors. They include Canadian National Railway Co., Shaw Communications Inc. and Telus Corp.
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