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What are we looking for?

TSX dividend stocks offering steadying price and earnings attributes amid the market volatility.

The screen

Over the past 21 trading days ended Sept. 22, there were eight days where the S&P/TSX Composite Total Return Index clocked in daily changes in value of greater than 1 per cent. Though not unexpected for an equity index even under normal circumstances, the heightened concern around a second wave of COVID-19 likely has many investors on edge. For those who seek calmer waters, today I use Morningstar CPMS to look for companies within the S&P/TSX Composite that have steadier characteristics than the broad market, with the intent to reduce the effect of medium-term market volatility. To find these stocks, I ranked the companies in the index on the following factors:

  • Five-year deviation of earnings (a statistical measure showing the consistency of a company’s earnings over the past five years. Steady companies will have lower deviations, which we prefer here);
  • 180-day deviation of total returns (similar to the above, but this measures stability in the stock’s price, rather than earnings. Lower figures are again preferred);
  • Five-year historical beta (this factor measures the historical sensitivity of a stock’s price movement against the index. A stock with beta less than one has historically moved less than the index in trending markets. For the purposes of this strategy, we prefer a lower beta);
  • Dividend yield;
  • Spread of fiscal estimates (this measures the difference in opinion of Street analyst estimates. Here we prefer a lower spread, implying that analysts have fairly consistent projections on the company’s future earnings).

To qualify, companies must pay a dividend yield that is in the top two-thirds of the index (today that figure is 1.4 per cent). Additionally, companies must have either a dividend payout ratio on earnings of less than 80 per cent, or a payout ratio on cash flow of less than 60 per cent, to ensure dividends paid are reasonably sustainable.

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: @MorningstarCDN.

What we found

I used Morningstar CPMS to back-test this strategy from January, 1999, to August, 2020, using a maximum of 15 stocks with no more than four per economic sector. Once a quarter, stocks were sold if their rank dropped below the top 35 per cent of the index on the factors listed above, or if dividend payout ratios exceeded the above limits. Over this period the strategy produced an annualized total return of 11 per cent while the S&P/TSX Composite Total Return Index advanced 6.9 per cent on the same basis. In calendar year 2008, the strategy lost 10.9 per cent while the index lost 33 per cent. In the first calendar quarter of this year, the strategy lost 10.4 per cent while the index lost 20.9 per cent.

The stocks that meet the requirements to be purchased into the model today are listed in the table below.

This article does not constitute financial advice. It is always recommended to speak to a financial adviser or professional before investing in any of the products listed here.

Select TSX dividend stocks

RankCompanyTickerMorningstar SectorMkt. Cap. ($ Mil.)5Y EPS Dev. (%)180D Dev. of Ttl. Rtns. (%)5Y BetaDiv. Yld. (%)Spread in FY Estim. (%)Payout Ratio on EPS (%)Payout Ratio on CF (%)Recent Close ($)YTD Ttl. Rtn. (%)
1BCE Inc.BCE-TCommun. Serv.50,434.
2Fortis Inc.FTS-TUtilities24,577.34.928.
3Emera Inc.EMA-TUtilities13,383.
4Telus Corp.T-TCommun. Serv.30,392.
5Loblaw Cos. Ltd.L-TConsumer Def.25,
6George Weston Ltd.WN-TConsumer Def.15,253.33.924.
7Cdn. National RailwayCNR-TIndustrials99,272.63.924.
8Rogers Commun.RCI-B-TCommun. Serv.26,
9Cdn. Utilities Ltd.CU-TUtilities8,769.75.434.
10Great-West Lifeco Inc.GWO-TFinancial Serv.24,008.53.538.
11Quebecor Inc.QBR-B-TCommun. Serv.8,250.95.527.
12Royal Bank of CanadaRY-TFinancial Serv.134,
13Sun Life Financial Inc.SLF-TFinancial Serv.31,555.
14TMX Group Ltd.X-TFinancial Serv.7,681.03.325.
15Algonquin Power Corp.AQN-TUtilities11,241.315.

Source: Morningstar CPMS. 

Data as of Sept. 22

Ian Tam, CFA, is director of investment research for Morningstar Canada.

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