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What are we looking for?

Sustainable dividends from Canadian firms set to gain with ratification of the U.S.-Mexico-Canada Agreement, or USMCA.

The screen

This week, the new trade deal got Democratic backing in the U.S. House of Representatives. This sets the stage for congressional approval in 2020. Our Parliament is expected to do the same shortly.

USMCA, which updates the 25-year-old North American free-trade agreement, is a big plus for Canadian-U.S. trade, with about $300-billion in goods going each way annually. It removes the threat of major tariffs for a range of Canadian industries.

To find top stocks primed for USMCA-related gains, we started with profitable and expanding Canadian companies. ​We then applied our TSI Dividend Sustainability Rating System. It awards points to a stock based on eight factors:

  • One point for a long-term (at least five years) record of dividends – two points for more than five years of continuous payments;
  • Two points if it has raised the payment in the past five years;
  • One point for management’s public commitment to dividends;
  • One point for operating in non-cyclical industries, which are less sensitive to the ups and downs of the economy (after all, sharply lower earnings could prompt a dividend cut to conserve cash);
  • One point for limited exposure to foreign currency exchange rates and freedom from political interference;
  • Two points for a strong balance sheet, including manageable debt and adequate cash;
  • Two points for a long-term record of positive earnings and cash flow sufficient to cover dividend payments;
  • One point if it’s an industry leader.

Companies with 10 to 12 points have the most secure dividends, or the highest sustainability rating. Those with seven to nine points have above-average sustainability; average sustainability, four to six points; and below average sustainability, one to three points.

More about TSI Network

TSI Network is the online home of The Successful Investor Inc. – the group of widely followed Canadian investment newsletters by editor and publisher Pat McKeough. They include our award-winning flagship newsletter, The Successful Investor. The TSI Best ETFs for Canadian Investors is the latest. TSI Network is also affiliated with Successful Investor Wealth Management.

What we found

Our TSI Dividend Sustainability Rating System generated seven stocks relying on open borders. Auto-parts leaders Linamar Corp. and Magna International Inc. depend on the free movement of manufacturing materials and products between their U.S., Canadian and Mexican factories as well as to automakers, also spread across North America. Another parts maker, Exco Technologies Ltd., ships its auto-interior components from Canada and Mexico into the United States. The networks of Canadian National Railway Co. and Canadian Pacific Railway Ltd. pass over borders. Saputo Inc. could see gains from expanded access to lower-cost U.S. milk. Maple Leaf Foods Inc. needs U.S. markets to maximize sales.

We advise investors to do additional research on any investments we identify below.

Select TSX-listed dividend stocks

Ranking*CompanyTickerDiv. Sustainability RatingPointsDiv. Yld. (%)Mkt. Cap. ($ Mil.)1Y Ttl. Rtn. (%)Recent Price ($)
1Canadian National RailwayCNR-THighest101.884,806.213.7118.86
2Canadian Pacific RailwayCP-THighest101.044,513.427.5326.92
3Saputo Inc.SAP-TAbove Average91.716,302.2-1.440.01
4Magna International Inc.MG-TAbove Average82.721,732.219.171.76
5Maple Leaf Foods Inc.MFI-TAbove Average82.33,194.1-9.525.50
6Linamar Corp.LNR-TAbove Average81.03,008.04.846.12
7Exco Technologies Ltd. XTC-TAverage64.4332.3-8.48.26

Source: Dividend Advisor

*Ranking is determined by TSI Dividend Sustainability Score. Where overall points are the same, analysts considered P/E, dividend yield and industry outlook to decide final placements.

Scott Clayton, MBA, is senior analyst for TSI Network and associate editor of TSI Dividend Advisor.

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