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What are we looking for?

Dividend stocks that are profitable and growing their payout.

The screen

As volatility persists in equity markets, investors are looking for a soft landing to preserve their capital. There is no better place to go than strong dividend payers with proven business models. These companies offer long-term gains with lower risk and tend to outperform the broader market during recessionary periods.

To search for stocks that align with this, I used Morningstar CPMS to rank 717 companies in the Canadian database on several factors.

First, we looked for companies with a dividend yield above 3.5 per cent, the approximate yield of the benchmark 10-year Canadian government bond.

Next, we wanted to rank companies that had a reputation for consistent dividend growth. A company must have either a five-year dividend growth rate of 2 per cent or more, or a minimum 10-per-cent expected dividend growth over the next 12 months. This is a “dual-factor” approach: We use the five-year rate as a measure of consistency while the expected rate can help us gauge continued growth.

From there, the goal was to further rank companies on how they are managing investor capital and demonstrating good financial health with consistent cash flow. To do this, we used trailing return on equity and annual operating cash flow momentum (the latest four quarters of operating cash flow compared with the same figure from one year ago).

We also looked for positive earnings momentum by comparing earnings for the latest reported quarter with that of the previous quarter. Next, importance was placed on companies where analyst estimate revisions are higher than minus 4 per cent (the median value for estimate revisions in the Canadian universe over the past 90 days – a negative figure means estimates have been revised downward).

To further qualify, the following screens were added:

  • Market capitalization greater than $2-billion
  • Dividend payout ratio less than 50 per cent. The payout ratio is the percentage of dividends paid out in the past four quarters in relation to cash flow.
  • Expected payout ratio below 80 per cent. This is the amount of dividends estimated to be paid in the next 12 months in relation to estimated earnings per share in the current fiscal year.

Note: Companies can qualify by meeting the threshold for either the dividend payout ratio (versus cash flow) or the expected payout ratio (versus earnings).

What we found

TSX-listed dividend growth stocks

RankCompanyTickerSectorMkt. Cap. ($ Mil.)Div. Yld. (%)5Y Div. Grth. Rate (%)Exp. Div. Grth. (%)Trail. ROE (%)Ann. CF Mom. (%)Qtly. Earns. Mom. (%)90D Earns. Revision (%)Div. Payout (%)Exp. Div. Payout (%)12M Ttl. Rtn. (%)Recent Price ($)
1Quebecor Inc.QBR-B-TComm. Svcs.5,621.
2Cdn. Natural ResourcesCNQ-TEnergy84,
3Whitecap Resources Inc.WCP-TEnergy5,926.64.6-7.356.622.6127.945.737.19.425.631.89.58
4Freehold Royalties Ltd.FRU-TEnergy2,374.16.9-
5Capital Power CorpCPX-TUtilities5,
6Suncor Energy Inc.SU-TEnergy58,927.34.4-4.823.724.2130.852.911.414.424.456.143.18
7Restaurant Brands Int'lQSR-TCons. Cyclical22,
8Cdn. Utilities Ltd.CU-TUtilities9,303.
9Atco Ltd.ACO-X-TUtilities4,678.
10Telus Corp.T-TComm. Svcs.38,

Source: Morningstar CPMS

The strategy has been back-tested from December, 2002, to September, 2022, assuming an equally weighted 10-stock portfolio with a maximum of four stocks per sector and no real estate investment trusts. Once a month, stocks were sold if they fell below the top 40 per cent of the universe using the metrics above. Stocks were replaced with the next best qualifying name not already held in the portfolio. Stocks were also sold if median current year earnings estimates fell below minus 10 per cent, dividends stopped growing, the expected payout ratio went above 100 per cent, or the dividend payout ratio went above 70 per cent. The strategy produced an annualized total return of 11.4 per cent, while the S&P/TSX Composite Total Return Index advanced 8.3 per cent.

Stocks qualifying for this model are listed in the accompanying table.

This article does not constitute financial advice. Investors are encouraged to conduct their own independent research before purchasing any of the investments listed here.

Joshua Farruggio is vice-president of business development at Morningstar Canada.

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