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What are we looking for?

Canadian small-cap dividend payers.

The screen

What a difference a year makes. The Canadian market has been enjoying a strong rebound off of 2015's dismal returns. The S&P/TSX composite total return index has posted a gain of 18.9 per cent so far in 2016, compared with a loss of 8.3 per cent last year.

Even more impressive has been the surge in the small caps: The S&P/TSX small-cap total return index is currently up 31.3 per cent year to date, bouncing back from a loss of 13.3 per cent in 2015.

Within the small-cap subset, we saw dividend payers offer a better safety cushion, dropping by only 7.6 per cent in 2015.

The lower volatility was also present on the upside – but, including only dividend-payers, the small-cap index would still be up about 24 per cent this year.

In order to search for smaller dividend-paying companies that may offer attractive returns with possibly less volatility, my colleague Lawrence Ullman and I used Morningstar CPMS to rank Canadian dividend-paying small caps with the best mix of:

  • Return on equity;
  • Asset turnover, that is, the ratio of sales to total assets;
  • Long-term debt to equity;
  • Three-month consensus earnings estimate revision (no worse than minus 15 per cent);
  • Short interest as a percentage of shares outstanding (lower is better for this screen);

We limited results to companies with market capitalization between $100-million and $1.5-billion, dividend yields of at least 2 per cent and dividend payout ratios less than 100 per cent.

More about the Ullman Group

The Ullman Group is an independent provider of strategic private capital management services to high-net-worth individuals, corporations, endowments, charities and foundations.

What we found

We used CPMS to perform a back-test starting Oct. 31, 2006, selecting an equally weighted portfolio of the top 15 stocks. Stocks would have been replaced if they fell outside of the top 40 per cent of the universe.

Over the full period, this strategy would have generated an annualized total return of 16.8 per cent, compared with 4.8 per cent for the S&P/TSX composite total return index and 1.7 per cent for the S&P/TSX small-cap total return index.

The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Ltd. or its affiliates.

Investors should contact a professional or do their own research before investing in any of the stocks shown here.

Craig McGee, CFA, is a portfolio manager and Lawrence Ullman, MBA, is a director, wealth management and portfolio manager with the Ullman Group at Richardson GMP in Toronto.

Richardson GMP Ltd. is a member of Canadian Investor Protection Fund. Richardson is a trademark of James Richardson & Sons Ltd. GMP is a registered trademark of GMP Securities LP. Both used under licence by Richardson GMP Ltd.

Select TSX small-cap dividend payers

RankCompanyTickerMarket Cap ($ Mil)Div. Yield (%)3M EPS Revision (%)Asset TurnoverDebt/EquityROE (%)Payout (%)Short Interest (%)
1KP Tissue Inc.KPT-T131.54.9624.310.00.06.777.40.2
2Calian Group Ltd.CGY-T179.64.67-
3Dominion Diamond Corp.DDC-T1,048.24.3240.10.30.0-0.629.71.0
4Velan Inc.VLN-T105.62.330.
5Tidewater MidstreamTWM-T469.62.42-
6Gluskin Sheff + Assoc.GS-T496.36.29-
7Information Serv. Corp.ISV-T304.94.59-
8Evertz TechnologiesET-T1,219.54.44-
9Imvescor RestaurantIRG-T182.62.80-
10Supremex Inc.SXP-T150.34.57-
11Intertape Polymer GrpITP-T1,405.
12North West Company Inc.NWC-T1,218.34.94-
13Sleep Country CanadaZZZ-T1,
14ZCL Composites Inc.ZCL-T372.52.630.
15Enerflex Ltd.EFX-T1,467.02.0410.

Source: Morningstar CPMS