What are we looking for?
Sustainable Canadian dividends bolstered by the high-flying U.S. dollar.
The screen
We’ve long recommended that Canadian investors have some 20 per cent to 30 per cent of their portfolios in U.S. stocks. That’s for the quality of top U.S. stocks, especially in the consumer and manufacturing sectors. Still, it’s also because we see exposure to the greenback as a valuable form of diversification. That’s a long-term plus, even beyond the current period of rapid interest-rate increases by the U.S. Federal Reserve, which has lifted international demand for the U.S. dollar – and the currency’s value.
In the meantime, some Canadian stocks are gaining with the elevated U.S. dollar. That’s especially true for firms making a sizable part of their profits in the United States. At the same time, companies selling their products in U.S. dollars globally, while incurring most of their costs in Canada, do well with a high U.S. dollar.
Our search started with Canadian dividend-payers with sound prospects that stand to gain from today’s strong U.S. dollar. We then applied our TSI Dividend Sustainability Rating System to that list of income payers. It awards points to a stock based on key factors:
- One point for five years of continuous dividend payments – two points for more than five;
- Two points if it has raised the payment in the past five years;
- One point for management’s commitment to dividends;
- One point for operating in non-cyclical industries;
- One point for limited exposure to foreign currency 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 to cover dividends;
- One point if the company’s an industry leader.
Companies with 10 to 12 points have the most secure dividends, or the highest sustainability. 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 Wealth Network
TSI Wealth 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, and The TSI Dividend Advisor. TSI Network is also affiliated with Successful Investor Wealth Management.
What we found
Our TSI Dividend Sustainability Rating System generated six stocks. Top insurer Manulife Financial Corp., headquartered in Toronto, makes about a third of its profits in the U.S. market. Calgary’s Enbridge Inc. also gains when its U.S. dollar profits are converted into Canadian dollars; the pipeline operator has more than half of its operations in the United States. Energy infrastructure company AltaGas Ltd., also headquartered in Calgary, made a big U.S. acquisition in 2018 and now enjoys steady profits from that business. Toronto-Dominion Bank, based in Toronto, has the highest exposure south of the border among the Big Five. Renewable-power generator Innergex Renewable Energy Inc., headquartered in Longueuil, Que., has about one-third of its capacity in the U.S. And finally, Toronto-based Labrador Iron Ore Royalty Corp. sells all its iron ore in U.S. dollars before converting back to Canadian currency.
We advise investors to do additional research on any investments we identify here.
Scott Clayton, MBA, is senior analyst for TSI Network and associate editor of TSI Dividend Advisor.
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Scott Clayton