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What are we looking for?

TSX-listed companies with momentum and a higher yield than the S&P/TSX Composite average.

The screen

It can be challenging for investors to find yield when interest rates decline the way that they have over the past year. While guaranteed investment certificates offer significantly lower risk, they offer minuscule yields and also don’t allow you to participate in the momentum of the stock market, which has recently hit new highs. Some investors have chosen to look for companies on the stock market that have a relatively higher yield than other stocks in the index and participate in the upside of the stock market at the same time.

Today I use Morningstar CPMS to look for names in the Canadian CPMS universe of 700 stocks that have a yield that is more than one percentage point higher than the S&P/TSX Composite average yield of 2.5 per cent and have relatively higher momentum based on the 50-day and 200-day moving averages. The moving averages are simple technical indicators that smooth out the trend in price. Essentially, we are looking for stocks that are trending in a positive direction based on the average price over a given period of time. For example, a reading in the accompanying table of 6.5 for “price relative to 50-day moving average” would indicate the stock’s current price is 6.5 per cent higher than its 50-day moving average.

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We also used the price change to 12-month high because it is a good momentum variable with downside protection. We’ve found that certain stocks that are trading close to their previous 12-month high have tended to perform well.

In order to make sure that the dividend is sustainable we’ve placed a limit of 100 per cent on the payout ratio. We want companies that are generating enough income to be able to finance their dividend internally. Lastly, we used the average monthly trading value over the past year to make sure that the stocks have enough liquidity. Average monthly trading value is expressed in millions of dollars and represents the total dollar value of shares traded, on average, each month over the past year.

We ranked our universe of 700 stocks according to three key momentum factors: the price relative to the 50-day and 200-day moving averages as well as the price change from the stock’s 12-month high.

Next, we applied three screens to create our list of stocks:

  • Dividend yield above 3.7 per cent;
  • Payout ratio not exceeding 100 per cent, based on the expected dividend and current-year earnings-per-share estimate;
  • Average monthly value traded over the past year must be greater than $6-million.

More about Morningstar

Morningstar Research Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. Morningstar offers an extensive line of products and services for individual investors, financial advisers, asset managers, retirement plan providers and sponsors, and institutional investors. Morningstar Direct is the firm’s multi-asset analysis platform built for asset management and financial services professionals. Morningstar Canada on Twitter.

What we found

Best of both worlds: Seeking stocks with momentum, higher-than-average yields

RankCompanyTickerMkt. Cap. ($ Mil.)Price Rel. to 200D MA (%)Price Rel. to 50D MA (%)Price Chg. from 12M High (%)Payout RatioAvg. Mnthly Trading Val. ($ Mil.)Div. Yld. (%)12M Price Chg. (%)Recent Price ($)
1Power Corp. of CanadaPOW-T26,752.124.06.5-0.539.31,587.54.265.243.02
2Alaris Eqty. Partners ITAD-UN-T837.614.47.2-0.165.756.47.156.218.63
3Nexus REITNXR-UN-T529.633.59.6-4.091.48.05.382.212.10
4Capital Power Corp.CPX-T4,987.214.94.1-0.298.2242.45.052.043.51
5Automotive Props REITAPR-UN-T515.312.94.0-0.185.712.86.134.313.19
6Dream Industrial REITDIR-UN-T3,494.618.84.2-0.890.9132.04.248.816.64
7IGM Financial Inc.IGM-T11,057.516.03.7-0.457.6229.84.945.446.29
8Great-West Lifeco Inc.GWO-T36,590.816.04.3-0.951.8819.14.547.939.36
9Slate Office REITSOT-UN-T368.617.21.2-0.763.416.47.342.85.44
10Bird Construction Inc.BDT-T512.411.510.1-3.143.820.44.041.49.66
11MCAN Mortgage Corp.MKP-T495.57.13.6-0.864.26.47.631.517.98
12Timbercreek FinancialTF-T790.17.21.5-0.797.215.47.116.09.74
13Emera Inc.EMA-T15,264.37.42.6-1.290.31,072.74.311.859.51
14Atrium Mortgage Invst.AI-T619.97.70.1-1.691.810.66.235.714.55
15Pizza Pizza Royalty Corp.PZA-T280.211.33.1-3.194.710.06.329.511.38

Source: Morningstar CPMS

I used CPMS to back-test the strategy from January, 2011, to July, 2021. During this process, a maximum of 15 stocks were purchased and equally weighted. The portfolio is rebalanced monthly and the strategy produced a respectable return of 11.7 per cent since inception whereas the S&P/TSX Composite High Dividend Total Return Index returned 7.1 per cent. Today, the 15 stocks that qualify for purchase into the strategy have an average yield of 5.6 per cent, which is 3.1 percentage points higher than that of the S&P/TSX Composite Total Return Index. They are listed in the accompanying table.

As always, investors are encouraged to conduct their own independent research before purchasing any of the investments listed here.

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Phil Dabo, MFin, is a vice-president of business development at Morningstar Research Inc.

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