What is the correct way to calculate the yield of a Canadian stock that pays its dividend in U.S. dollars?
Let’s start with a general definition: Yield is a company’s annualized dividend expressed as a percentage of its current share price.
When the currency of the dividend and share price match, the calculation is straightforward. Fortis Inc. (FTS), for example, pays a quarterly dividend of 50.5 cents or $2.02 annually. As I write this on Friday afternoon, the shares are trading at $55.16 on the Toronto Stock Exchange, so the yield is $2.02 divided by $55.16, or about 3.66 per cent. (The yield may change slightly depending on Fortis’s closing price.)
But it’s not so simple when the dividend is declared in one currency and the share price is quoted in another. Dividing the former by the latter would produce a meaningless result because it’s a case of apples and oranges. To calculate the yield properly, you would need to express the dividend and share price in the same currency.
Consider Algonquin Power & Utilities Corp. (AQN). It pays an annual dividend of US$0.6824 and its shares traded Friday afternoon at $18.52 on the TSX. To convert the U.S. dividend to Canadian currency, you would divide it by the loonie’s exchange rate of about US$0.828. This works out to a dividend of $0.8242 in Canadian dollars (0.6824/0.828). Dividing $0.8242 by Algonquin’s share price of $18.52 on the TSX produces a yield of 4.45 per cent.
Fun fact: You would get the same yield by dividing Algonquin’s dividend of US$0.6824 by its share price of US$15.32 on the New York Stock Exchange. (Algonquin is one of many Canadian stocks inter-listed on a U.S. exchange.) As long as the currencies match, the yield will be correct.
Not all financial websites calculate yields properly when the currencies don’t line up, so it’s handy to know how to crunch the numbers yourself.
How can I find the total return of a stock?
Unlike a stock’s simple return, which measures only the change in its price, the total return includes dividends and assumes they were reinvested in additional shares. This gives a more complete or “total” picture of a stock’s return.
For Canadian stocks and exchange-traded funds, the “Compound Returns Calculator” at canadastockchannel.com is a great resource. The calculator lets you specify a date range and will give you the stock’s total return over that period, as well as an annualized return, with dividends reinvested or collected in cash.
Interested in the total return of the S&P/TSX Composite Index over a certain period? A quick and dirty method is to enter XIC – the symbol for the iShares Core S&P/TSX Capped Composite Index ETF – into the calculator. Because XIC’s management expense ratio is a minuscule 0.06 per cent, the ETF is a very good proxy for the index it tracks.
If you want to know the S&P/TSX’s exact total return, visit XIC’s page on the iShares Canada website (Google “XIC ETF”) and scroll down to “Performance.” There, you’ll find total returns for XIC and its “benchmark” index, the S&P/TSX, over various periods that you can adjust to your preference.
For total returns of individual U.S. stocks, check out the “DRIP/individual stock return” calculator at dqydj.com. The website also has total return calculators for the S&P 500, Dow Jones Industrial Average and other U.S. indexes.
On Wednesday, my Capital Power Corp. (CPX) shares dropped by nearly 4 per cent because of a “bought deal” the company announced to raise capital. Problem is, the $250-million offering was priced at $38.45 a share, which was below the closing price of $39.82 before the deal was announced. I’m curious why companies do that. Telus did it not long ago, too. Why wouldn’t they simply do the deal at the existing share price?
I’m sure Capital Power would have loved to do that. But if it had tried to sell $250-million worth of shares at the market price, it wouldn’t have found any takers on Bay Street.
In a bought deal, a syndicate of underwriters – in this case it was led by TD Securities and CIBC Capital Markets – agrees to purchase the entire share issue. The company gets its money, but the financial risk is then transferred to the underwriters, who must try to resell millions of new shares to investors.
In exchange for taking on that risk – and tying up their own capital – the underwriters negotiate a discount on the shares. As an investor in a solid company such as Capital Power, you shouldn’t lose any sleep over this: Bought deals provide a relatively quick and certain way for companies to raise money to fund their growth. In my experience, when the share price falls because of a bought deal, it can be a good time to buy because the drop often turns out to be temporary.
E-mail your questions to firstname.lastname@example.org. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.
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