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What are we looking for?

Less common Canadian dividend growth companies.

The screen

Dividends can be a great way to add stability to your investment portfolio. Companies that pay and maintain a dividend over the long term tend to be more stable in nature and fluctuate less when markets are choppy. While most investors tend to gravitate toward large dividend payers such as banks or utilities, as there can be comfort in familiarity, there can still be opportunities among the lesser-known companies.

Today, my strategy is to search for dividend growth stocks outside of the S&P/TSX Composite Index, to find companies with a stable dividend history that aren’t as readily recognizable as their counterparts on the index. The strategy will consider stocks in the CPMS Canadian Universe excluding the S&P/TSX, which as of today holds 466 names.

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This strategy ranks stocks based on expected dividend growth (what a company is expected to pay in dividends compared with what they have paid across the trailing four quarters, high values are preferred); five-year dividend growth (an annualized number, high values preferred); and five-year cash flow growth (annualized, high values preferred). In order to qualify, stocks must have:

  • A five-year beta of one or less. Beta measures a company’s sensitivity relative to historical changes in the benchmark – here we use the S&P/TSX. In trending markets, a stock with beta less than one has historically moved less than the index;
  • Five-year dividend growth in the top third of peers; today this equates to a value of 5.01 per cent or higher;
  • A dividend payout ratio less than 80 per cent to ensure not all earnings are paid out as dividends and some remain for future growth/projects – calculated as expected annual dividends divided by expected earnings per share;
  • Expected dividend growth greater than or equal to zero;
  • Dividends paid in the past four quarters greater than zero.

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.

What we found

I used Morningstar CPMS to back-test this strategy from September, 1997, to May, 2020. During this process, a maximum of 10 stocks were purchased. Stocks were sold if their five-year beta rose to 1.3 or higher or if their expected dividend growth rate fell below zero. When sold, the positions were replaced with the highest-ranked stock not already owned in the portfolio. To account for the possible lower liquidity of some of the names, a 1-per-cent liquidity fee has been worked in – that is, stocks will be sold at a price 1 per cent lower and stocks purchased at a price 1 per cent higher. Over this period, the strategy produced an annualized total return of 13 per cent while the S&P/TSX gained 6 per cent on the same basis. It’s also worth noting that the model outperformed the S&P/TSX in 81 per cent of down markets. (Note that a down market is defined as a quarter in which the S&P/TSX posted negative returns.)

Only nine stocks qualified for purchase into the strategy today; they are listed in the accompanying table. As always, investors are encouraged to conduct their own independent research before purchasing any of the investments shown here.

Select Canadian-listed dividend stocks not part of the S&P/TSX Composite Index

RankCompanyTickerMkt. Cap. ($ Mil.)Div. Yld. (%)Exp. Div. Growth (%)5Y Div. Growth (%)5Y CF Growth (%)5Y BetaDiv. Payout Ratio (%)Trail. Div. ($/shr.)12M Price Chg. (%)Recent Price ($)
1Newmont Corp.NGT-T59,425.01.878.699.4-0.10.248.70.7546.273.41
2Centamin PLCCEE-T2,993.96.371.426.95.00.770.60.0937.82.59
3E-L Financial Corp.ELF-T2,694.20.70.036.415.81.04.05.00-8.1685.00
4Sylogist Ltd.SYZ-X252.84.111.411.911.90.474.60.40-5.110.64
5Cogeco Inc.CGO-T1,216.52.25.014.25.80.422.41.811.184.48
6Lassonde IndustriesLAS-A-T523.71.69.216.20.0-0.222.42.38-16.3164.63
7Andrew Peller Ltd.ADW-A-T412.42.31.110.05.70.751.20.21-31.29.46
8Richards Packaging IFRPI-UN-T664.82.20.010.522.21.038.21.3238.059.20
9PFB Corp.PFB-T67.63.60.09.48.80.441.40.36-8.310.10

Source: Morningstar CPMS

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

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