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What are we looking for?

Dividend-paying stocks that show momentum.

The screen

While many investors are plagued with uncertainty after the market volatility over the past week or so, those who subscribe to the idea that market momentum will continue, despite the recent dip, may look to this week's strategy for some ideas. To create this strategy, I used Morningstar CPMS to look for Canadian companies that both pay a dividend and have exhibited positive price momentum in trailing periods. The idea here is to look for dividend-payers that are still showing short- to medium-term momentum in the hopes that a sustainable yield will offer some protection in a market downturn. The strategy ranks stocks on:

  • Absolute price change from month end three months, six months and nine months ago (higher figures preferred);
  • Dividend yield.

To qualify, companies must pay a yield of some sort, and must have a payout ratio of less than 80 per cent (to ensure that stocks aren't paying out too much of their earnings in the form of dividends).

Only the largest 250 names in Canada were considered in this analysis, excluding real estate investment trusts.

More about Morningstar

Morningstar Research Inc. provides independent investment research in North America, Europe, Australia and Asia. Its research tool, Morningstar CPMS, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers. CPMS data cover more than 95 per cent of the investable North American stock market. With more than 110 equity and credit analysts, Morningstar has one of the largest independent institutional equity research teams in the world.

What we found

I used Morningstar CPMS to back-test this strategy from December, 1985, to January, 2018. During this process, a maximum of 25 stocks were purchased and equally weighted with no more than four stocks an economic sector. Once a quarter, stocks were sold if their rank fell below the top 30 per cent of the ranked universe of 250 companies, or if the company's dividend payout ratio exceeded 100 per cent (signalling to investors that the company can no longer sustain dividends). When sold, the positions were replaced with the highest ranked stock not already owned in the portfolio. Over this period, the strategy produced an annualized total return of 15.3 per cent while the S&P/TSX Composite Total Return Index produced 8.3 per cent. In 2008, in the midst of the financial crisis, this strategy lost 27.1 per cent while the index lost 33 per cent.

Today, only 20 stocks meet our requirements for purchase and are listed in the accompanying table. It is recommended that investors conduct their own independent research before purchasing the investments listed here.

Ian Tam, CFA, is a relationship manager for CPMS at Morningstar Research Inc.

Select TSX-listed dividend stocks

RankCompanyTickerMorningstar SectorMarket Cap ($Mil)Div. Yield (%)Payout Ratio (%)Price Chg from ME 3M ago (%)Price Chg from ME 6M Ago (%)Price Chg from ME 9M Ago (%)Recent Price ($)
1First Quantum MineralsFM-TBasic Materials 13,939.3
2Labrador Iron OreLIF-TBasic Materials 1,651.2 3.8838.812.328.951.325.80
3Teck Resources Ltd.TECK.B-TBasic Materials 21,417.9 0.544.626.020.255.337.36
4BRP Inc.DOO-TCons. Cyclical 1,996.8 0.6111.810.926.059.252.30
5Canadian Western BankCWB-TFin. Services 3,341.7 2.5532.42.929.955.237.67
6Yamana Gold Inc.YRI-TBasic Materials 3,936.4 0.6014.325.812.518.64.15
7Enghouse Systems Ltd.ENGH-TTechnology 1,738.4 0.9933.616.825.89.064.40
8Finning InternationalFTT-TIndustrials 5,593.2 2.2942.77.516.329.333.24
9Martinrea International Inc.MRE-TCons. Cyclical 1,279.5 0.815.7-4.035.331.914.75
10Genworth MI Canada Inc.MIC-TFin. Services 3,756.8 4.5538.7-4.314.835.141.31
11Enerplus Corp.ERF-TEnergy 3,125.2 0.9411.99.215.720.512.83
12Morneau Shepell Inc.MSI-TIndustrials 1,249.9 3.3677.26.713.39.423.21
13TMX Group Ltd.X-TFin. Services 4,191.4 2.6438.68.914.06.075.68
14Constellation SoftwareCSU-TTechnology 16,936.2 0.6314.55.815.114.4799.20
15Dollarama Inc.DOL-TCons. Defensive 17,196.4 0.288.5-1.925.723.7154.74
16Sun Life Financial Inc.SLF-TFin. Services 31,403.0 3.5439.60.97.316.051.44
17Aecon Group Inc.ARE-TIndustrials 1,111.9 2.6747.2-4.79.727.218.75
18Chorus Aviation Inc.CHR-TIndustrials 1,128.7 5.3345.1-7.88.821.69.00
19New Flyer Industries NFI-TCons. Cyclical 3,462.3 2.3637.212.17.1-1.055.00
20Premium Brands HoldingPBH-TCons. Defensive 3,300.1 1.5838.

Source: Morningstar Canada

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