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What are we looking for?

A way to improve the performance of a high-yield strategy.

The screen

In a 2018 Merrill Lynch report titled “ESG plus Quant equals Alpha,” the authors concluded that, from a pure alpha standpoint, incorporating environmental, social and governance concerns into a rules-based investment strategy improves returns.

Many investors have an affinity for stocks with a high dividend yield, both for the cash-flow aspect as well as the prudence it imposes on management to be responsible stewards of capital. What the study found was that an ESG overlay on a high-dividend-yield strategy would have improved annual returns by a staggering three percentage points.

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We will look for these high-yielding companies with strong Refinitiv ESG scores that, according to the study, are more likely to outperform. The study looked at only U.S. companies, but for the screen we will also include Canadian stocks and use the following criteria:

First, we use the Refinitiv SmartEstimate (a more predictive estimate than the consensus mean) to identify those companies forecast to yield more than 5 per cent over the next 12 months (NTM).

Next, we screen for those whose Refinitiv ESG Score is 75 or higher. This score is a combination of the environmental and social scores – which are percentile scores relative to global industry peers – and the governance score – which is relative to national peers.

Finally, we consider the companies’ creditworthiness – using Refinitiv’s Combined Credit Score – and require a score of at least 60, as a credit crunch would hurt both the stock price as well as put the dividend in jeopardy.

More about Refinitiv

Refinitiv, formerly the financial and risk business of Thomson Reuters, is one of the world’s largest providers of financial markets data and infrastructure, serving more than 40,000 institutions globally. With a dynamic combination of data, insights and technology, as well as news from Reuters, our customers can access solutions for every challenge, including a breadth of applications, tools and content – all supported by human expertise.

What we found

The pan-North American screen yields only four companies, three of which are Canadian blue-chips. (There are 176 U.S. companies with an ESG score above 75. Of these, nine have a dividend yield exceeding 5 per cent, but only Occidental Petroleum Corp. satisfied all criteria, with a credit score of 60 or higher.)

There is some concern over the Canadian banking sector related to the “witches’ brew” of domestic concerns around housing, consumer leverage and oil prices. However, Bank of Nova Scotia has been growing its international footprint, with Canada representing only 55 per cent of income for 2018. (Over the two decades preceding 2018 this share averaged 80 per cent and had never dipped below 70 per cent.) Scotiabank is also paying particular attention to the Pacific Alliance countries of Mexico, Colombia, Peru and Chile.

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Canadian Imperial Bank of Commerce is similarly is showing strong performance beyond Canada, with a 25-per-cent increase in net income from its U.S. commercial and wealth segment in the first quarter, compared with the same period a year ago.

High-dividend stocks that also score highly on ESG

CompanyTickerCountryMarket Cap. (US$Mil)Dividend (%) (NTM)ESG ScoreRefinitiv Credit Rank1Yr ReturnRecent Price ($)*
Bank of Nova ScotiaBNS-TCanada65,6045.1%8673-3.6%71.24
Occidental Petroleum Corp.OXY-NUSA51,1325.9%78693.6%68.37
BCE Inc.BCE-TCanada40,2815.4%779715.5%59.69
Canadian Imperial Bank of CommerceCM-TCanada36,4895.2%86632.6%109.42

Refinitiv

Share price is in native currency.

Investors are advised to do their own research before trading in any of the securities shown here.

Hugh Smith, CFA, MBA, is manager of Refinitiv’s investment management business for the Americas, and is a director on the board of the Responsible Investment Association of Canada.

Disclosure: The author personally owns shares of BNS.

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