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What are we looking for?

A way to play market volatility, in which Canadian dividend growers go to cash when the market declines.

The screen

With markets continuing to show turbulence throughout 2020, it’s understandable that investors may be concerned about their portfolio. Volatility can make even the most seasoned investor question their methods. The typical advice in any periods of volatility is to stay invested – and for very good reason – but going to cash can be a tempting option to avoid downward fluctuations. What’s most important, however, is that whatever method you choose to follow is one based on research and professional advice rather than emotion.

Today’s strategy will be looking for the top dividend-growing stocks, but will only be invested so long as the market is trending above its 80-day moving average (the market here is defined as the S&P/TSX Composite Index). To further clarify, if the market is below its 80-day moving average, the model will be fully invested in cash, taking this as a signal of impending volatility.

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We use this particular technical indicator as it helps show when the market may be on the brink of further downward volatility (model goes to cash), and on the flip side when the market appears poised to recover (model reinvests in the market). This strategy ranks stocks based purely on their expected dividend growth rate, which looks at what a company has paid in dividends during the past four quarters compared with what they are expected to pay in dividend over the next four quarters; higher values preferred. Stocks that qualify must have:

  • A market capitalization in the top half of peers – today this value is $399.2-million or higher;
  • A positive expected dividend growth rate;
  • Paid a dividend in the past four quarters.

As stated above, the market must be above its 80-day moving average in order for stocks to be held – otherwise, the model will hold cash until the market trends upward.

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 September, 1997, to August, 2020. During this process, a maximum of 15 stocks were purchased.

Individual stocks were sold if their expected dividend growth rate fell below zero, in which case they were replaced with the highest-ranked stock not already owned in the portfolio. In the event the market trended downward, all positions were sold and the model was held in cash until the market trended upward again, at which point a new portfolio of 15 stocks was purchased based on the same criteria.

Over this period, the strategy produced an annualized total return of 13.5 per cent while the S&P/TSX Composite Total Return Index advanced 6.4 per cent on the same basis. It’s also worth noting that the maximum drawdown of the strategy (defined as the lowest-performing period) was minus 10.7 per cent, compared with the benchmark’s maximum drawdown of minus 43.4 per cent. 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.

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Select S&P/TSX dividend stocks

CompanyTickerMkt. Cap. ($ Mil.)Mkt. Rel. to 80D MA (%)Expected. Div. Grth. Rate (%)Div. Yld. (%)12M Price Chg. (%)Recent Close ($)
GFL Environmental Inc.GFL-T8,521.01.8302.90.2n/a27.11
B2Gold Corp.BTO-T8,794.21.8197.41.995.68.43
Centerra Gold Inc.CG-T4,848.21.8150.01.246.316.47
Dundee Precious MetalsDPM-T1,727.91.8100.01.1113.99.54
Andlauer HealthcareAND-T555.51.880.30.5n/a44.44
Newmont Corp.NGT-T70,395.71.849.31.574.887.57
Richelieu Hardware Ltd.RCH-T1,955.21.838.00.835.734.68
Canacol Energy Ltd.CNE-T637.11.833.35.9-22.33.52
Quebecor Inc.QBR-B-T8,215.81.828.02.49.032.78
First Capital REITFCR-UN-T2,989.51.820.06.3-37.913.70
Jamieson Wellness Inc.JWEL-T1,500.41.819.01.362.537.82
goeasy Ltd.GSY-T899.21.818.42.88.164.41
Enghouse Systems Ltd.ENGH-T3,958.41.816.10.896.271.61
Cdn. Pacific Railway Ltd.CP-T53,721.91.814.51.034.6396.39
Canaccord GenuityCF-T756.91.810.03.134.57.02

Source: Morningstar CPMS

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

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