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What are we looking for?

Canadian companies with growing fundamentals that also pay a dividend.

The screen

Whether or not you’ve locked in your RRSP contribution for 2018 (the deadline is Friday), today, let’s look at a strategy that offers reasonable ideas that may appeal to those managing a self-directed registered retirement savings plan. The strategy focuses on profitable Canadian companies that show good mid-to-long-term growth in fundamentals such as earnings, cash flow and sales, and that also pay a dividend. To find them, I first ranked all companies in the Morningstar CPMS Canadian universe (which today consists of 706 companies) on the following factors:

  • Five-year deviation of earnings a share (a safety factor, measuring the variability of operating earnings, lower figures preferred);
  • Five-year beta (a stock’s historical sensitivity to the S&P/TSX Composite Index, lower figures preferred);
  • Five-year growth rate of EPS, cash flow and sales (on average, how much have these figures have grown over the past five years);
  • Dividend yield.

To qualify, companies must have a market capitalization greater than $110-million. This figure is meant to exclude the bottom one-third of stocks by market cap in our universe.

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 120 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 April, 1995, to January, 2019. During this process, a maximum of 15 stocks were purchased and equally weighted with no more than four in any economic sector. Once a month, stocks were sold if their rank fell below the top 35 per cent of the ranked universe, or if a company’s reported or median estimate EPS turned negative (not shown). 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 13.4 per cent while the S&P/TSX Composite Total Return Index gained 8.1 per cent. Additionally, there were 32 of 94 quarters in which the S&P/TSX showed negative returns. Of these 32 quarters, the above strategy beat the benchmark 78 per cent of the time (25 times), which speaks to the defensive nature of this model.

The stocks that qualify for purchase today are listed in the accompanying table. It is always recommended to speak to a financial adviser or investment professional before investing.

Select TSX dividend stocks

RankCompanyTickerMarket Cap ($Mil)5Y Dev. of Earns5Y Historical Beta5Y CF Growth (%/yr)5Y Sales Growth (%/yr)5Y EPS Growth (%/yr)Div. Yield (%)Recent Close ($)Price Chg. from Month End, 12M Ago (%)
1Firm Capital MortgageFC-T                                      346.4
2Brookfield Real EstateBRE-T                                      151.3
3BCE Inc.BCE-T                                52,481.8 2.50.4-0.5-
4North West Company Inc.NWC-T                                   1,576.8 5.0-
5Emera Inc.EMA-T                                10,835.4
6Dorel Industries IncDII-B-T                                      566.4 10.40.4-
7Telus Corp.T-T                                28,752.9
8Bank of Nova ScotiaBNS-T                                89,783.2
9CIBCCM-T                                50,298.7
10Leon's Furniture Ltd.LNF-T                                   1,142.4
11Great-West Lifeco Inc.GWO-T                                30,145.8
12Fortis Inc.FTS-T                                20,214.8
13Northland Power Inc.NPI-T                                   4,394.0 23.80.736.616.819.94.924.5211.4
14Transcontinental Inc.TCL-A-T                                   1,857.7
15Algonquin Power Corp.AQN-T                                   7,147.0 18.10.515.46.531.04.614.6215.2

Source: Morningstar CPMS

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