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What are we looking for?

Companies that haven’t cut their dividends since the turn of the century.

The screen

For dividend investors, one of the greatest fears is that in the midst of all this market uncertainty the dividend will get cut. This is a legitimate fear since conservative investors who are now facing close to a zero-per-cent interest rate environment may be relying on equity yields to supplement their income requirements.

There is no foolproof way to tell which companies will end up cutting dividends, since that is up to a company’s management. However, there are a few hints that we as investors can look at to provide a bit of comfort. These include: 1) the payout ratios on a company’s existing dividends (the ratio of dividend to earnings or operating cash flow); 2) the company’s current guidance on what it expects to pay in the coming quarter; and 3) the company’s own history of sustaining or increasing dividends.

This week, I leverage the Morningstar CPMS Canadian database to look for companies that have met all three of these requirements. More specifically, I’ve screened for companies that have:

  • A payout ratio on expected earnings or expected cash flow of less than 80 per cent and 60 per cent, respectively;
  • Announced that they are either keeping their dividend the same, or increasing it in the upcoming fiscal quarter (expressed through the expected dividend growth rate in the table);
  • Paid a consistent dividend since 2000 and have kept annual dividends the same or increased them in each fiscal year since 2000;
  • A dividend yield greater than 1 per cent.

More about Morningstar

Morningstar Research Inc. is a leading provider of independent investment research in North America, Europe, Australia and Asia. Morningstar offers an extensive line of products and services for individual investors, financial advisers, asset managers, retirement plan providers and sponsors, and institutional investors. Morningstar Direct is the firm’s multiasset analysis platform built for asset management and financial services professionals. Morningstar Canada on Twitter: @MorningstarCDN.

What we found

There are 20 companies that meet all of these requirements. As a conceptual test, I used Morningstar Direct to measure the performance of this static portfolio, assuming the purchase of all 20 companies on an equally weighted basis on Jan. 1, 2000, rebalancing back to equal weights once a year. As of market close on March 24, the theoretical portfolio showed an annualized total return of 11.8 per cent while the category average for Canadian dividend and income funds produced 5.7 per cent over the same period.

The year-to-date return of the static portfolio is minus 26.4 per cent while the category average is minus 28 per cent. Note that this does not constitute a true back-test, since at the time (20 years ago) we would not have known to purchase these stocks as we did not have the 20-year history of dividends at our disposal.

(Remember that a true back-test buys stocks based on the factor values at the start of the test, using the information known at that time. As those factor values changed, the back-test engine buys and sells stocks accordingly, as new information is fed into the engine. Today’s concept is different in that the portfolio remains static the entire time.)

The static list of 20 stocks is shown in the table, in order of market capitalization.

This column does not constitute financial advice. It is always recommended to speak to a financial adviser or investment professional before investing.

Select Canadian-listed dividend stocks

CompanyTickerMkt. Cap. ($ Mil.)Payout on Estim. Earns. (%)Payout on Estim. CF (%)Expected Div. Grth. Rate (%)Div. Yld. (%)Ttl. Rtn. YTD (%)Trailing Div. Per Share ($)Recent Close ($)
Royal Bank of CanadaRY-T102,878.146.338.64.36.0-28.74.1472.25
Cdn. National RailwayCNR-T70,378.138.427.37.02.3-15.62.1598.56
Bank of Nova ScotiaBNS-T56,676.850.342.11.77.7-35.13.5446.72
TC Energy Corp.TRP-T45,465.579.443.28.06.7-29.93.0048.45
Bank of MontrealBMO-T35,968.043.835.52.97.5-43.14.1256.24
Loblaw Cos. Ltd.L-T21,495.927.610.21.62.1-10.41.2459.7
Fortis Inc.FTS-T19,557.170.930.94.54.5-20.81.8342.2
Metro Inc.MRU-T13,219.629.021.612.51.7-2.20.8052.18
National Bank of CanadaNA-T13,006.242.731.84.47.3-46.32.7238.73
CCL Industries Inc.CCL-B-T6,250.126.615.25.92.1-36.40.6834.99
Cdn. Tire Corp. Ltd.CTC-A-T4,483.732.
Empire Co. Ltd.EMP-A-T4,
Atco Ltd.ACO-X-T3,217.558.
Maple Leaf Foods Inc.MFI-T2,528.670.730.910.33.1-20.50.5820.41
Finning InternationalFTT-T2,209.747.422.90.66.1-45.70.8213.53
Cdn. Western BankCWB-T1,377.936.327.75.57.3-49.61.1015.79
Transcontinental Inc.TCL-A-T838.538.
Guardian Capital GroupGCG-A-T456.356.936.411.33.9-38.40.5816.39
Algoma Central Corp.ALC-T274.253.917.017.16.6-43.50.417.25

Source: Morningstar Research Inc.

Ian Tam, CFA, is director of investment research for Morningstar Canada.

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