What are we looking for?
A Canadian non-financials dividend portfolio paying a solid yield.
For many Canadian investors interested in consistent dividends over time, one word comes to mind: banks. Canadian banks and other financials are commonly seen in many investors' equity portfolios, either as individual holdings, or as part of a mutual fund or exchange-traded fund. That said, investors looking to diversify with dividend-paying companies outside of the financials sector can look to today's strategy for some ideas. To find these companies, I used Morningstar CPMS to rank stocks first on the best combination of:
- Yield on expected dividends (here we used what the company has announced that they will be paying, but have not yet paid);
- Five-year earnings-per-share growth rate (on average, how much a company has grown its earnings annually over the last five years);
- Quarter-to-quarter growth rate of earnings (latest reported quarterly EPS excluding unusual gains or losses, compared against the same quarter one year ago);
- Earnings variability (a proprietary CPMS metric that calculates how stable a company’s earnings are over time – lower figures preferred).
To qualify, companies must have a five-year track record of paying dividends. To ensure dividend sustainability, only companies with a dividend payout ratio less than 80 per cent were considered. Companies were selected from the CPMS 250 universe (which consists of the largest 250 companies in Canada by market float, excluding unit 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 June, 1990, to August, 2017. During this process, a maximum of 15 stocks were purchased with a maximum of four an economic sector to ensure reasonable diversification. Stocks were sold if their rank fell below the top 50 per cent of the universe or if the stock's payout ratio exceeded 100 per cent. 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 11.4 per cent while the S&P/TSX composite total return index gained an annualized 8.1 per cent. Over the same time period, the strategy on average yielded 3.7 per cent while the index yielded 2.4 per cent. The stocks that currently meet our requirements for purchase are listed in the accompanying table.
As always, it is recommended that investors conduct their own independent research before purchasing any of the investments listed here.
Ian Tam, CFA, is a relationship manager for CPMS at Morningstar Research Inc.
A non-financials dividend portfolio
|Rank||Company||Ticker||Morningstar Sector||Market Cap ($ Mil)||Expected Yield (%)||Earns. Variability||5Yr EPS Growth Rate (%)||Q/Q EPS Growth Rate (%)||Payout Ratio (%)|
|1||Northland Power Inc.||NPI-T||Utilities||4,062.6||4.6||10.7||64.5||57.4||73.5|
|4||Telus Corp.||T-T||Comm. Services||26,485.9||4.4||4.3||6.5||-2.5||68.4|
|5||North West Company Inc.||NWC-T||Cons. Defensive||1,482.3||4.2||5.5||5.7||6.2||71.9|
|6||Ag Growth International||AFN-T||Industrials||836.9||4.6||11.9||4.6||29.1||65.2|
|8||Canadian Utilities Ltd.||CU-T||Utilities||10,289.7||3.8||5.7||0.1||-2.7||60.3|
|9||Transcontinental Inc.||TCL.A-T||Cons. Cyclical||2,087.2||3.0||4.9||8.0||14.9||30.8|
|10||Canadian National Railway||CNR-T||Industrials||75,795.2||1.6||2.4||15.0||20.7||29.2|
|11||WSP Global Inc.||WSP-T||Industrials||5,344.2||2.9||7.1||17.5||16.5||49.3|
|12||Morneau Shepell Inc.||MSI-T||Industrials||1,102.3||3.8||13.2||11.2||12.4||75.0|
|13||Domtar Corp.||UFS-T||Basic Materials||3,411.9||3.9||13.6||8.0||4.5||54.8|
|14||Metro Inc.||MRU-T||Cons. Defensive||9,115.9||1.6||2.8||12.2||6.8||23.3|
|15||New Flyer Industries||NFI-T||Cons. Cyclical||3,133.9||2.6||14.4||91.3||17.6||41.5|
Source: Morningstar Canada