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What are we looking for?

Canadian companies with high, sustainable dividend yields.

The screen

Following last year's comeback rally, many investors are becoming concerned about the heightened valuations of the Canadian market. The S&P/TSX composite currently trades at an average of 21.2 times trailing four quarters' operating earnings, levels not seen since the end of 2002. On a forward basis, the S&P/TSX has a price-to-earnings ratio of 16.8, which also appears high but is still below many periods in the past 10 years, and it should be sustainable if earnings continue to improve. The average expected dividend yield of the S&P/TSX is currently 2.7 per cent.

My colleague Lawrence Ullman and I turned to Morningstar CPMS to help us identify Canadian stocks with high, but still sustainable yields. We ranked companies by expected dividend yield that also met the following criteria:

  • Market capitalization greater than $500-million;
  • Dividend payout ratio less than 60 per cent of cash flow;
  • Dividend payout ratio less than 80 per cent of operating earnings;
  • Three-month consensus earnings estimate revision no worse than minus 5 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 Dec. 31, 2006, reselecting an equally weighted portfolio of up to 10 companies semi-annually.

Over the full period, this strategy would have generated an annualized total return of 8.3 per cent compared with 4.7 per cent for the S&P/TSX composite total return index. Over the past 12 months, this strategy would have posted a return of 22.8 per cent while the index came in with a return of 21.1 per cent.

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.

TSX-listed dividend stocks with high and sustainable payouts

RankCompanyTickerMarket Cap ($Mil)Div. Yield (%)CF Payout (%)Earnings Payout (%)3M EPS Revision (%)
1Just Energy Group Inc.JE-T1,067.16.944.368.521.7
2Chorus Aviation Inc.CHR-T908.26.528.251.1-2.6
3Morguard REITMRT.UN-T908.76.452.855.20.0
4Callidus Capital Corp.CBL-T948.
5First National FinFN-T1,680.96.149.357.90.0
6IGM Financial Inc.IGM-T9,723.95.659.169.61.3
7Gluskin Sheff + Assoc.GS-T566.95.550.678.79.5
8Rogers Sugar Inc.RSI-T633.55.348.077.48.1
9Genworth MI Canada Inc.MIC-T3,
10BCE Inc.BCE-T50,978.04.734.475.2-0.8

Source: Morningstar Canada