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What are we looking for?

Canadian dividend growers showing good corporate governance relative to their global peers.

The screen

As socially responsible investing continues to proliferate in the Canadian investor landscape, many may wonder whether using ESG (environmental, social and governance) factors in investing actually helps returns in the long run. Logically, a company with good corporate policies around these topics should facilitate good long-term growth. This week, I isolate one of these factors and test the concept by looking for stocks in Canada that not only pay a dividend, but have good ratings on their corporate governance policies (the "G" pillar in ESG). To find these stocks, I ranked the largest 200 companies in Canada by market capitalization using the following metrics:

  • Dividend yield;
  • Three-year historical dividend and cash-flow growth rates;
  • Expected dividend growth rate (difference between the announced annual dividend and trailing dividends paid in the past four quarters, not shown);
  • Sustainalytics Governance Score (a percentile score from zero to 100 measuring how well a company is pro-actively managing governance issues that are material to its business, relative the company’s global peers). Examples of corporate policies that affect this score include the independence of the board of directors, the level of gender/national diversity on the board, strong policies on bribery and corruption, amount spent on lobbying and political expenses, among many others.

To qualify, companies must have a dividend payout ratio of less than 80 per cent on expected earnings or less than 60 per cent of trailing cash flow. These limits ensure that the company is paying a reasonably sustainable yield.

More about Morningstar Research and Sustainalytics Inc.

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. Sustainalytics, a leading independent global provider of ESG research and ratings, is a strategic partner to Morningstar. The firm’s company-level ESG ratings underpin Morningstar’s sustainability rating for funds.

What we found

I used Morningstar CPMS to back-test this strategy from August, 2009, to March, 2019. During this process, a maximum of 15 stocks were purchased with no more than three per economic sector. Stocks were sold if their rank fell below the top 35 per cent of our universe of 200 companies. 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 9.5 per cent while the S&P/TSX Composite Total Return Index gained 7.3 per cent across the same period. The same strategy without including the Sustainalytics Governance Score returned 7.9 per cent over the same period, which would imply that considering a company’s corporate governance might yield better results than not doing so.

Stocks that qualify for purchase into the strategy today 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.

Select TSX-listed dividend stocks with good corporate governance ratings

RankCompanyTickerMarket Cap ($Mil)Recent Share Price ($)Sustainalytics Governance Score3Yr Div. Growth Rate (%/Yr)3Yr CF Growth Rate (%/Yr)Fwd Payout Ratio on Earns (%)Trailing Payout Ratio on CF (%)Div. Yield (%)12M Price Chg (%)
1West Fraser Timber Co.WFT-T                               4,459.3 66.497651.659.614.45.31.2-23.5
2Telus Corp.T-T                             29,700.6 49.48907.37.273.833.04.47.7
3Enbridge Inc.ENB-T                             99,416.7 49.148113.1-8.2118.648.26.026.4
4Teck Resources Ltd.TECK.B-T                             18,271.9 32.239027.540.
5Suncor Energy Inc.SU-T                             69,667.1 44.15798.930.964.523.03.8-10.1
6Vermilion Energy Inc.VET-T                               5,181.6 33.89771.412.2388.746.48.1-21.9
7Toronto-Dominion BankTD-T                           135,117.5 73.72809.813.043.529.04.02.2
8BCE Inc.BCE-T                             53,464.6 59.51825.02.889.538.85.39.2
9Manulife Financial Corp.MFC-T                             46,236.3 23.547710.09.334.89.34.2-2.8
10Transcontinental Inc.TCL.A-T                               1,438.5 16.47737.517.934.915.15.3-39.1
11Canadian Tire Corp.CTC.A-T                               9,183.1 147.657220.95.832.127.42.8-15.6
12Cineplex Inc.CGX-T                               1,525.7 24.09743.71.6140.351.37.2-19.7
13Innergex Renewable EnergyINE-T                               1,897.4 14.26723.135.4259.340.14.95.3
14Algonquin Power Corp.AQN-T                               7,460.4 15.21749.517.577.744.14.521.7
15Royal Bank of CanadaRY-T                           148,086.7 103.16777.610.245.335.54.05.7

Source: Morningstar CPMS and Sustainalytics Inc. 

Ian Tam, CFA, is a relationship manager for CPMS at Morningstar Research Inc.