What are we looking for?
Canadian stocks with strong dividend yields and a track record of dividend growth and stock price appreciation.
With Canadian interest rates at historic lows and the prospect of flat (or possibly declining) interest rates, the options available for Canadian income investors are few. With bonds and GICs yielding less than 2 per cent over a one- to five-year time horizon, dividend growth stocks are perhaps one of the few bright spots in the investing landscape for the income investor.
The screen
We will be using Recognia Strategy Builder to search for Canadian stocks yielding more than a two-year GIC and which have demonstrated a track record of dividend growth and stock price appreciation.
We begin by setting a minimum market cap threshold of $3-billion. This represents approximately the largest 15 per cent of TSX traded companies.
Next, we will look for Canadian stocks with dividend yields of at least 2 per cent. Yields on two-year GICs in Canada are currently running between 1.05 per cent and 2 per cent. We also wish to focus on companies whose dividends have been growing over the past five years. We will screen for companies with average annual dividend growth rates of at least 5 per cent.
Finally, to focus on companies with rising stock prices, we will limit our list to companies whose share prices have appreciated by 5 per cent or more over the past year.
More about Recognia
Recognia is a global leader in automated quantitative analysis and engagement solutions for retail online brokers and institutions. Recognia's product suite provides actionable trading ideas based on technical and fundamental research covering stocks, ETFs, indexes, forex, options and commodities.
What did we find?
Pulp and paper maker Domtar ranks No. 1 on our list. The company is currently yielding 3.6 per cent and has a five-year dividend growth rate of 42.2 per cent. Domtar merged with U.S.-based Weyerhaeuser in 2006 to create the world's second-largest paper company.
Montreal-based BCE Inc. has been a stalwart of Canadian income portfolios for many years. Its dividend yield of 4.8 per cent is the highest of any company on our list. In addition, BCE has a long track record of increasing dividends, currently providing a 9.4-per-cent dividend growth rate. On April 30, the company announced first-quarter results that exceeded analyst expectations on both revenue and earnings.
Enbridge is the largest company on our list with a market cap of $48.6-billion. The company has a 3.3-per-cent yield and a 13.6-per-cent dividend growth rate. In spite of the difficult environment for the energy sector, Enbridge has managed a 12.5-per-cent stock price increase over the last 12 months.
Historical performance
Recognia Strategy Builder provides a backtesting capability to evaluate how well an investing strategy would have worked in the past. Using a five-year historical period with quarterly rebalancing, the screen described had a 9.9-per-cent annualized return compared to 4.9 per cent for the S&P/TSX 60 index and 5.1 per cent for the S&P/TSX composite.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia Inc. in respect of the investment in financial instruments. Investors should conduct further research before investing.
Peter Ashton is vice-president of retail and self-directed investing at Recognia Inc.