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What are we looking for?

With the continued volatility in equity markets, shrinking government bond yields and next to zero savings rates – reliable and consistent income is increasingly challenging to find. We decided to examine highest yielding Canadian securities that have a proven track record of growth, display dividend sustainability, and are forecast to hike dividends shortly. Income seekers may find solace looking at companies with demonstrated historical, stable present and optimistic future dividend outlooks.

The screen

To begin our analysis, we used FactSet’s Universal Screening tool to pull all publicly traded securities on the Toronto Stock Exchange.

Next, we narrowed down our screen to only include companies with a proven track record of consistently raising their dividends by at least 10-per-cent annualized over the past five years. Additionally, analysts covering the company must predict the dividend will continue to grow sequentially over the next two years.

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As measures of dividend sustainability, we only included companies that have a dividend payout ratio of less than 100 per cent and positive free cash flow after paying out dividends on an annual basis. This indicates the company can afford to continue paying the existing dividend utilizing existing cash flows, without the need for debt or external financing. Last, we only included companies with a net-debt-to-EBITDA ratio of less than three. (EBITDA stands for earnings before interest, taxes, depreciation and amortization.) This limits any concerns regarding debt, allowing the company to focus on growing the dividend.

This left us with 21 companies, of which the top 10 are shown here, which we ranked by their dividend yield.

More about FactSet

FactSet is a leading global financial data and technology company. FactSet’s superior suite of content, analytics and work-flow solutions covers the entire portfolio life cycle and offers actionable insights for asset managers and investment professionals around the world.

What we found

Ten highest yielding Canadian securities

CompanyTickerFactSet SectorFactSet SubsectorMkt. Cap. ($ Mil.)Div. Yld. (%)5Y Ann. Div. Grth. (%)Net Debt ($ Mil.)Net Debt/EBITDA2020 DPS ($)2021 Estim. DPS ($)2022 Estim. DPS ($)FCF less Div. ($ Mil.)Div. Payout (%)YTD Ttl. Rtn. (%)Recent Close ($)
Quebecor Inc.QBR-B-TTelecommunicationsTelecommunications8,113.43.3365.25,718.82.90.8001.0681.172783.233.12.633.07
Sleep Country Canada Hldgs.ZZZ-TConsumer CyclicalsConsumer Retail1,004.42.8624.6395.82.10.3900.7800.840131.822.64.527.28
Canadian Tire Corp. Ltd.CTC-A-TConsumer Non-CyclicalsFood and Staples Retail11,597.32.5216.45,500.82.34.5884.6534.9771,872.737.213.0186.59
TMX Group Ltd.X-TFinanceInvestment Services7,399.12.3411.2553.11.12.7203.0273.250164.054.94.7131.62
Guardian Capital GroupGCG-A-TFinanceInvestment Services905.02.2016.8-71.0-0.30.6300.7400.82053.637.823.332.67
Cogeco CommunicationsCCA-TTelecommunicationsTelecommunications5,647.32.1310.62,617.32.22.3202.3412.576321.630.024.1120.05
Cascades Inc.CAS-TNon-Energy MaterialsManufactured Products1,583.32.0714.91,654.02.50.3200.3430.370306.015.57.515.48
Canaccord Genuity Group Inc.CF-TFinanceInvestment Services1,359.51.9820.1-1,139.3-2.50.2500.3050.3401,153.09.514.412.63
Badger Infrastructure SolutionsBDGI-TIndustrialsIndustrial Services1,148.61.9110.6115.41.40.5950.6230.63052.283.8-12.732.96
Canadian National Railway Co.CNR-TIndustrialsIndustrial Services91,503.91.9013.012,268.01.72.3002.4612.5471,668.045.9-6.8129.25

EBITDA: earnings before interest, taxes, depreciation and amortization. DPS: dividend per share. Source: FactSet

A variety of companies are represented in our top 10, from an established railway to a stock-exchange operator. Notably, no Canadian banks or utilities passed our screen, as they tend to increase their dividends far more conservatively than 10-per-cent annualized and often carry substantially more debt. Moreover, Canadian banks have been prohibited from raising dividends (or buying back shares) since March, 2020.

Quebecor Inc. topped our screen with a dividend yield of 3.33 per cent and ample amounts of excess free cash flow of $783.2-million. With a relatively low payout ratio of 33.1 per cent and an impressive five-year dividend growth rate of 65.2 per cent, the aggressive dividend hikes forecast by analysts for 2021 and 2022 appear achievable. Quebecor looks well positioned as its total number of subscribers is estimated by analysts to grow 9.4 per cent year over year in 2021 (not shown), driven by strong performance in its wireless segment.

Sleep Country Canada Holdings Inc. came in at No. 2 with a dividend yield of 2.86 per cent and a five-year dividend growth rate of 24.6 per cent. While 2020 resulted in some COVID-19 related headwinds and a dividend cut of 49.4 per cent over 2019 (not shown), 2021 is expected to be a bounceback year, with Sleep Country expected to double its 2020 dividend per share.

Canadian Tire Corp. was the only consumer non-cyclical company to make the top 10 list. While the forecast 2021 dividend is only marginally higher than 2020, 2022 looks more optimistic as Canadian Tire could benefit from increased foot traffic as COVID-19 restrictions loosen and capacity allowances increase for retailers.

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The information in this article is not investment advice. FactSet assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained above.

Full disclosure: The author personally owns shares in Quebecor Inc., Canadian Tire Corp., TMX Group Ltd., Magna International Inc. and Canadian National Railway Co.

Arjun Deiva, CFA, is a vice-president at FactSet Canada’s consulting division.

Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.

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