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number cruncher

What are we looking for?

Canadian stocks likely to withstand a rise in interest rates while maintaining a dividend.

The screen

A growing concern among investors is the seemingly inevitable future of rising interest rates, and what the effect will be on their investment portfolio. With many Canadians holding dividend-paying stocks, it’s understandable why an increase in rates may be concerning; as interest rates rise, we can see a sell-off in dividend stocks as investors shift their money toward the higher yielding bonds.

However, it is very important to distinguish between dividend-paying stocks and dividend-growing stocks. Dividend-paying stocks are just that – stocks that pay a dividend, whereas dividend growers not only pay a dividend, but also have a track record of increasing their dividends consistently over time. These stocks are typically more stable in nature and are less likely to be as heavily affected by changes in macroeconomic conditions, such as interest rate hikes.

Today, I’m showcasing a strategy that searches for dividend-growing companies that are more likely to withstand an increase in interest rates. This strategy ranks stocks based on:

-Five-year dividend growth – annualized dividend growth across the past five years, high values are preferred;

-Expected dividend growth – percentage change in the next four quarters of expected dividends (based on Street projections) compared with the trailing four quarters of paid dividends, high values are preferred;

-Quarterly earnings surprise – a proprietary measure of the difference between actual and expected quarterly earnings, high values are preferred.

More about Morningstar

Morningstar Research Inc. provides independent investment research in North America, Europe, Australia and Asia. Its research tool, Morningstar CPMS, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers. CPMS data cover more than 95 per cent of the investable North American stock market. With more than 110 equity and credit analysts, Morningstar has one of the largest independent institutional equity-research teams in the world.

What we found

I used Morningstar CPMS to back-test this strategy from January, 2004, to April, 2018. During this process, a maximum of 15 stocks were purchased. No more than five stocks per economic sector could be held at any time. When sold, the positions were replaced with the highest-ranked stock not already owned in the portfolio. Over this period, the strategy produced an annualized total return of 13.3 per cent while the S&P/TSX Composite Total Return Index gained 7.2 per cent across the same period. Downside deviation (measured as the variability of negative returns) was 7.2 per cent compared with the S&P/TSX Composite Total Return, which had a downside deviation of 8.7 per cent.

Stocks that qualify for purchase into the strategy today are listed in the table below. As always, investors are encouraged to conduct their own independent research before purchasing any of the investments listed here.

Canadian-listed stocks showing strong dividend growth

RankCompanyTickerMarket Cap ($Mil)Recent Price ($)Div. Yield (%)5Yr Ann. Div. Growth (%)Expected Div. Growth (%)Qtrly Earns Surprise (%)
1Newfoundland CapitalNCC.A-T 355.6 14.053.619.342.910.3
2Lassonde IndustriesLAS.A-T 920.2 284.411.112.132.810.6
3Gildan ActivewearGIL-T 7,953.3 36.751.627.514.10.0
4CCL Industries Inc.CCL.B-T 11,107.6 62.830.832.19.51.0
5Magna International Inc. MG-T 28,846.0 80.792.124.514.31.6
6Brookfield Asset ManagementBAM.A-T 51,437.5 51.861.517.25.3296.9
7Savaria Corp.SIS-T 755.1 16.892.124.516.10.0
8ZCL Composites Inc.ZCL-T 313.3 10.155.381.19.1-1.8
9Enghouse Systems Ltd.ENGH-T 1,792.1
10Goeasy Ltd.GSY-T 535.5 39.402.319.717.60.7
11Waste Connections Inc.WCN-T 25,495.7 96.770.725.37.70.0
12Hardwoods Distribution Inc.HDI-T 402.7 18.801.518.97.44.3
13Canadian Pacific Railway Ltd.CP-T 34,389.7 238.461.111.815.60.0
14Cogeco Inc.CGO-T 947.6 64.502.415.96.85.6
15Metro Inc.MRU-T 9,330.9 40.921.819.17.90.0

Source: Morningstar Canada

Emily Halverson-Duncan, CFA, is a director, CPMS sales at Morningstar Research Inc.