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What are we looking for?

A strong, diverse portfolio of dividend growth stocks that also have a strong history of returning capital to shareholders through share buybacks.

More about today's screen

George Vasic, strategist for UBS Securities Canada Inc., completed a screen at the end of September that looked for stocks with high dividend growth and high true yield.

True yield is a way to calculate how much capital companies return to investors through dividends and share buybacks. True yield is calculated by taking the dividend yield minus the three-year compound annual growth of shares outstanding (if companies reduce shares outstanding it results in a higher true yield than the dividend yield).

Mr. Vasic's screen also adjusted for sector diversification. His approach was to fill each sector with stocks with the highest true yields that are also rated "buy" or "neutral" by his shop. If possible, each sector was filled with high true yield stocks until the sector weighting of the S&P/TSX composite index was reached.

The list of 12 stocks filled the financials weighting at 33 per cent (versus 30 per cent for the benchmark), the energy weighting at 25 per cent (versus 25 per cent for the benchmark), materials at 8 per cent (versus 23 per cent for the benchmark because only one stock, Methanex Corp., qualified) and 33 per cent for other stocks (versus 22 per cent for the benchmark).

"This approach shows there is scope for TSX benchmarked investors to diversify out of telecoms/utilities/financials (where dividend growers are concentrated), therefore avoiding relative performance being largely a sector call," Mr. Vasic wrote in a report.

What did we find out?

Mr. Vasic calculated that this strategy has outperformed the S&P/TSX composite by a big margin – 1.4 per cent over three years versus negative 12.1 per cent for the benchmark. (In an Oct. 20 report, Mr. Vasic recalculated the returns to be 4.1 per cent versus the benchmark's negative 10.3 per cent over the three years.)

Mr. Vasic also pointed out that half of the stocks on the list had reduced their share counts over the previous three years versus 15 per cent for the benchmark. He also pointed out that the dividend yield of the group was 3.5 per cent, versus 2.5 per cent for the benchmark, while the true yield was 4.1 per cent versus negative 5.2 per cent for the benchmark. Finally, the group's five-year dividend growth rate was 18 per cent, versus just 2.4 per cent for the benchmark.