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What are we looking for?

Canadian dividend stocks with a positive ESG screen.

The screen

Socially responsible investing is often thought of as a separate investment style, like value investing or momentum investing. In practice, investors need not choose between their ethical beliefs and their investment objectives. Screens for ESG (recall this is shorthand for environmental, social and governance criteria) can be added to any style of investing, allowing people to meet their investment goals while still retaining control regarding the ethical standards of the companies and the exposure to company risks they want to avoid.

With dividend stocks being such a popular choice of investment, today I’ve created a strategy that looks for Canadian dividend stocks suitable for socially responsible investors. The universe comprises all Canadian stocks within the CPMS universe, which today holds 702 names. This strategy ranks stocks based on:

  • Overall ESG score – measures how a company proactively manages the ESG issues that most affect to their business; scores are from 0-100, with 100 being the best;
  • Five-year annualized dividend growth;
  • Annual dividend momentum – percentage change in dividends paid out during the most recent four quarters relative to the dividends paid out the year before;
  • Quarterly earnings surprise – proprietary measure of the difference between actual and expected quarterly earnings between expected and actual reported quarterly earnings; higher values are preferred.

In order to qualify, stocks must have an overall ESG score in the top one-third of peers (today, this value is greater than or equal to 58); stocks must also have a controversy score less than or equal to three (how a company’s misconduct affects stakeholders on a scale of one to five, five being the most severe). Lastly, stocks must have a non-negative five-year annualized dividend growth rate, annual dividend momentum and quarterly earnings surprise.

More about Morningstar & Sustainalytics

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. Sustainalytics, a global provider of ESG research and ratings, is a strategic partner to Morningstar. Its company-level ESG ratings underpin Morningstar’s Sustainability Rating for funds.

What we found

I used Morningstar CPMS to back test this strategy from October, 2012, to April, 2018. During this process, a maximum of 10 stocks were purchased. Stocks were sold if their ESG score fell below the top third of peers, if their controversy score was greater than three or their five-year dividend growth rate dropped below zero. When sold, the positions were replaced with the highest-ranked stock not already owned in the portfolio.

Over this period, the strategy produced an annualized total return of 13.3 per cent while the S&P/TSX Total Return Composite returned 7.4 per cent across the same period. It’s also worthwhile to note that in all quarters over this period where the index showed negative returns, our strategy beat the benchmark 88 per cent of the time.

Stocks that qualify for purchase into the strategy today are listed in the table below. As always, investors are encouraged to conduct their own independent research before purchasing any of the investments listed here.

Select dividend stocks with relatively strong ESG scores

RankCompanySymbolRecent Price ($)Mkt. Cap. ($ Mil.)Div. Yield (%)5Y Ann. Div. Growth (%)Overall ESG ScoreControversy ScoreAnn. Div. Momentum (%)Qtly. Earnings Surprise (%)
1Toronto-Dominion BankTD-T76.40140,983.93.59.577.
2Enbridge Income Fund Hldgs.ENF-T28.574,990.17.911.966.
3Sun Life Financial Inc.SLF-T55.0433,551.03.54.466.
4Keyera Corp.KEY-T34.127,028.14.910.563.
5TransCanada Corp.TRP-T54.0247,858.35.17.860.
6Rogers CommunicationsRCI.B-T61.9131,872.
7Gibson Energy Inc.GEI-T17.012,447.07.85.362.
9Transcontinental Inc.TCL.A-T28.462,499.73.07.659.
10Bank of Nova ScotiaBNS-T80.0395,911.64.16.464.

Source: Morningstar Canada

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

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/05/24 2:06pm EDT.

SymbolName% changeLast
Toronto-Dominion Bank
Sun Life Financial Inc
Keyera Corp
TC Energy Corp
Gibson Energy Inc
Canadian Imperial Bank of Commerce
Bank of Nova Scotia

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