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Inside the Market Bargains plus juicy yields: A dividend stock picking strategy that has produced monstrous returns

Shell out! Shell out! Halloween is fast approaching and income investors want their dividends. They have bowls of candy to fill for the little witches and goblins who are soon to arrive at their doors.

Thankfully, Canadian dividend investors have a little extra to spend because they’ve done well in recent years. An investor who purchased an equal-dollar amount of the dividend stocks in the S&P/TSX Composite Index and rebalanced at the end of each year, would have gained an average of 10.2 per cent compounded annually from the end of 2001 to the end of 2017. By way of comparison, the market index itself climbed at a 7.5-per-cent annual rate over the same period. (All of the return figures herein include dividend reinvestment, but do not include fund fees, taxes or other trading frictions.)

Dividend investors would have fared even better by focusing on bargain stocks. But, before I reveal their monstrous returns, prepare for a fright.

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I started my investigation, like a budding Dr. Frankenstein, by slicing the dividend stocks in the index into two portfolios by dividend yield. Half went into the high-yield portfolio and the other half fell into the low-yield portfolio. I then proceeded to carve them into bits.

But rotting worms popped out in the process. Simply put, dividend stocks with negative earnings fared poorly. Stocks in the low-yield portfolio with negative earnings gained an average of 4.5 per cent annually over the period. Those in the high-yield group gained a mere 1.1 per cent annually. Both produced unhealthy returns compared with the market index.

Dividend stocks with positive earnings provided better results. The low- and high-yield portfolios were each carved up into five portfolios (quintiles) by price-to-earnings ratio (P/E). The 10 resulting (equally weighted) portfolios were fed through the Bloomberg back-tester, which tracked and refreshed them annually over the 16 years to the end of 2017. The results are shown in the accompanying table, which displays the average annual compound return of each portfolio.

Nine of the 10 portfolios beat the market index, and often handily. The only one to lag was the portfolio of low-yielding stocks with the second-highest P/E ratios, which trailed the index by an average of 1.5 percentage points annually.

Five of the 10 portfolios beat the portfolio containing all of the dividend stocks in the index, which climbed 10.2 per cent annually.

Generally speaking, the high-yield portfolios fared better than the low-yield portfolios. Score one for the high-yield team. On the other hand, stocks with lower-P/Es and low-yields beat the lower-P/E high-yield groups.

The lowest-P/E portfolios fared the best. The top return was seen by the lowest-P/E low-yield portfolio with an average annual return of 14.2 per cent. It beat the all-dividend stock portfolio by an average of four percentage points annually and the market index by 6.7 percentage points annually.

You can find a list of the dividend payers in the S&P/TSX Composite Index, sorted by yield, at the end of the online version of this article. Half have yields of more than 3.1 per cent and half pay less.

Roughly speaking, stocks in the lowest-P/E group currently have ratios below 10.9. The second lowest group has ratios between 10.9 and 16.4.

Mind you, the ratios and yields vary from year-to-year as the market climbs and falls.

The ghost of money-manager Benjamin Graham would point out that the ratios of the lower-P/E portfolios are very similar to the rule of thumb he devised for defensive investors decades ago. He advised conservative investors to seek dividend stocks trading for less than 15 times earnings in his book The Intelligent Investor. His ideas might be a little dusty, but they’re still performing well.

The Intelligent Investor still haunts bookstores today because it was reanimated by Jason Zweig in 2005. It would make a great treat for young investors who’ve grown too old to wander the streets this Halloween.

Canadian Dividend Stocks by Yield and P/E, 2001-2017

(Compound annual growth rate, split in half by yield and into quintiles by price-to-earnings ratio)

Compound Annual Growth Rate
P/E Low Yield Portfolio High Yield Portfolio
1 (Lowest) 14.2% 12.1%
2 (Low) 11.1% 10.5%
3 (Medium) 8.6% 9.4%
4 (High) 6.0% 9.9%
5 (Highest) 8.2% 10.3%

Source: Bloomberg based on dividend stocks in the S&P/TSX Composite Index

Dividend Payers in the S&P/TSX Composite Index sorted by Yield

Company Ticker Price P/E Yield
AltaGas Ltd. ALA-T $21.52 48.15 10.18%
Artis REIT AX.UN-T $11.25 8.94 9.60%
TransAlta Renewables Inc. RNW-T $10.59 13.98 8.88%
Chemtrade Logistics Income Fund CHE.UN-T $14.30 49.35 8.39%
Alaris Royalty Corp. AD-T $19.55 53.98 8.29%
Ensign Energy Services Inc. ESI-T $5.91 16.42 8.12%
Inter Pipeline Ltd. IPL-T $21.99 14.75 7.64%
Exchange Income Corp. EIF-T $29.66 14.23 7.38%
H&R REIT HR.UN-T $19.29 7.87 7.15%
Enbridge Income Fund Holdings ENF-T $31.89 n/a 7.09%
Crombie REIT CRR.UN-T $12.70 23.32 7.01%
Dorel Industries Inc. DII.B-T $22.42 9.59 6.96%
Chorus Aviation Inc. CHR-T $6.92 6.83 6.94%
IGM Financial Inc. IGM-T $33.02 10.86 6.81%
Vermilion Energy Inc. VET-T $40.84 49.82 6.76%
Brookfield Renewable Partners BEP.UN-T $38.27 n/a 6.66%
Norbord Inc. OSB-T $36.32 4.84 6.61%
Extendicare Inc. EXE-T $7.27 25.86 6.60%
Capital Power Corp. CPX-T $27.41 26.28 6.53%
Northview Apartment REIT NVU.UN-T $24.98 13.58 6.52%
Cominar REIT CUF.UN-T $11.35 9.27 6.34%
Enbridge Inc. ENB-T $42.61 13.96 6.30%
Brookfield Property Partners BPY.UN-T $26.12 n/a 6.27%
Gibson Energy Inc. GEI-T $21.18 141.11 6.23%
Choice Properties REIT CHP.UN-T $11.87 6.54 6.23%
Laurentian Bank of Canada LB-T $41.56 7.03 6.16%
Emera Inc. EMA-T $38.46 36.20 6.11%
RioCan REIT REI.UN-T $23.80 14.34 6.05%
Dream Global REIT DRG.UN-T $13.37 19.03 5.98%
Russel Metals Inc. RUS-T $25.42 9.54 5.98%
Power Financial Corp. PWF-T $29.20 10.85 5.93%
Peyto Exploration & Development PEY-T $12.17 11.54 5.92%
Northland Power Inc. NPI-T $20.36 17.70 5.89%
BCE Inc. BCE-T $51.40 15.55 5.88%
Freehold Royalties Ltd. FRU-T $10.76 n/a 5.86%
SmartCentres REIT SRU.UN-T $29.89 16.12 5.85%
Superior Plus Corp. SPB-T $12.42 n/a 5.80%
Innergex Renewable Energy Inc. INE-T $12.11 54.63 5.62%
Sienna Senior Living Inc. SIA-T $16.40 36.18 5.60%
Power Corp. of Canada POW-T $27.57 6.74 5.54%
Canadian Utilities Ltd. CU-T $29.59 14.86 5.32%
TransCanada Corp. TRP-T $52.60 15.71 5.25%
Keyera Corp. KEY-T $34.51 22.70 5.22%
Pembina Pipeline Corp. PPL-T $44.11 21.52 5.17%
Algonquin Power & Utilities Co. AQN-T $12.88 14.29 5.17%
Granite REIT GRT.UN-T $52.94 16.94 5.15%
Cineplex Inc. CGX-T $33.92 26.16 5.13%
Great-West Lifeco Inc. GWO-T $30.83 10.12 5.05%
Computer Modelling Group Ltd. CMG-T $8.06 32.44 4.96%
Shaw Communications Inc. SJR.B-T $24.23 20.74 4.89%
Brookfield Infrastructure Partners BIP.UN-T $50.72 n/a 4.82%
Hydro One Ltd. H-T $19.29 14.58 4.77%
Western Forest Products Inc. WEF-T $1.89 8.57 4.76%
Genworth MI Canada Inc. MIC-T $39.91 8.12 4.71%
Crescent Point Energy Corp. CPG-T $7.64 n/a 4.71%
TELUS Corp. T-T $44.71 17.05 4.70%
North West Co Inc. NWC-T $27.60 17.46 4.64%
Bank of Nova Scotia BNS-T $73.83 10.82 4.61%
Canadian Imperial Bank of Commerce CM-T $118.54 10.02 4.59%
Lucara Diamond Corp. LUC-T $2.19 15.06 4.57%
First Capital Realty Inc. FCR-T $19.01 19.13 4.52%
Whitecap Resources Inc. WCP-T $7.39 27.98 4.38%
Dream Office REIT D.UN-T $23.29 17.89 4.29%
Atco Ltd. ACO.X-T $35.61 17.54 4.23%
Chartwell Retirement Residence CSH.UN-T $13.97 50.98 4.21%
ARC Resources Ltd. ARX-T $14.30 35.13 4.20%
Manulife Financial Corp. MFC-T $20.97 9.26 4.20%
TORC Oil & Gas Ltd. TOG-T $6.40 50.26 4.12%
Fortis Inc. FTS-T $41.44 16.17 4.10%
Transcontinental Inc. TCL.A-T $20.75 6.43 4.05%
Killam Apartment REIT KMP.UN-T $15.88 8.08 4.03%
National Bank of Canada NA-T $62.53 10.72 3.97%
Mullen Group Ltd. MTL-T $15.17 33.74 3.96%
Royal Bank of Canada RY-T $100.70 12.38 3.89%
Intertape Polymer Group Inc. ITP-T $18.76 12.01 3.88%
Maxar Technologies Ltd. MAXR-T $38.23 38.45 3.87%
Kinder Morgan Canada Ltd. KML-T $17.00 50.69 3.82%
Sun Life Financial Inc. SLF-T $49.82 11.36 3.81%
Boralex Inc. BLX-T $16.64 90.20 3.79%
Element Fleet Management Corp. EFN-T $7.91 17.29 3.79%
CI Financial Corp. CIX-T $19.15 8.32 3.76%
Allied Properties Real Estate AP.UN-T $41.71 23.89 3.74%
Bank of Montreal BMO-T $104.74 12.40 3.67%
Labrador Iron Ore Royalty Corp. LIF-T $27.87 16.44 3.59%
Toronto-Dominion Bank TD-T $75.65 12.41 3.54%
PrairieSky Royalty Ltd. PSK-T $22.19 50.70 3.52%
Pason Systems Inc. PSI-T $20.82 58.61 3.46%
Enercare Inc. ECI-T $29.04 42.88 3.44%
Canadian Natural Resources Ltd. CNQ-T $39.12 20.97 3.43%
Industrial Alliance Insurance IAG-T $49.06 9.28 3.38%
NFI Group Inc. NFI-T $45.41 13.24 3.30%
Secure Energy Services Inc. SES-T $8.34 n/a 3.24%
Restaurant Brands International QSR-T $73.80 23.08 3.17%
Canadian Western Bank CWB-T $32.93 11.34 3.16%
Thomson Reuters Corp. TRI-T $58.67 35.80 3.10%
Aecon Group Inc. ARE-T $16.33 26.93 3.06%
WestJet Airlines Ltd. WJA-T $18.36 10.50 3.05%
Cogeco Communications Inc. CCA-T $64.06 8.79 2.97%
Suncor Energy Inc. SU-T $48.80 19.91 2.95%
Rogers Communications Inc. RCI.B-T $65.26 17.36 2.94%
Canadian Apartment Properties CAR.UN-T $45.56 28.00 2.92%
Nutrien Ltd. NTR-T $71.64 n/a 2.90%
Morneau Shepell Inc. MSI-T $27.13 32.14 2.88%
Magna International Inc. MG-T $61.95 7.08 2.77%
Sleep Country Canada Holdings ZZZ-T $27.03 17.11 2.74%
Tricon Capital Group Inc. TCN-T $10.33 7.87 2.71%
TMX Group Ltd. X-T $86.37 18.49 2.69%
Intact Financial Corp. IFC-T $105.08 18.62 2.66%
Parkland Fuel Corp. PKI-T $44.30 28.17 2.65%
Cameco Corp. CCO-T $15.27 n/a 2.62%
SNC-Lavalin Group Inc. SNC-T $44.86 18.25 2.56%
Finning International Inc. FTT-T $31.60 19.13 2.53%
ShawCor Ltd. SCL-T $24.19 27.45 2.48%
Westshore Terminals Investment WTE-T $25.97 15.35 2.46%
Husky Energy Inc. HSE-T $20.45 14.06 2.44%
Canadian Tire Corp. CTC.A-T $148.65 14.53 2.42%
InterRent Real Estate Investme IIP.UN-T $11.47 5.06 2.35%
WSP Global Inc. WSP-T $65.75 25.70 2.28%
TransAlta Corp. TA-T $7.05 n/a 2.27%
Enerflex Ltd. EFX-T $16.82 21.40 2.26%
Premium Brands Holdings Corp. PBH-T $86.77 29.64 2.19%
Ritchie Bros Auctioneers Inc. RBA-T $43.61 34.12 2.15%
George Weston Ltd. WN-T $91.57 17.94 2.14%
Altus Group Ltd. AIF-T $28.40 n/a 2.11%
Boardwalk REIT BEI.UN-T $48.00 15.36 2.09%
Wheaton Precious Metals Corp. WPM-T $22.52 25.55 2.08%
Birchcliff Energy Ltd. BIR-T $4.93 18.44 2.03%
Osisko Gold Royalties Ltd. OR-T $10.06 213.12 1.99%
Lundin Mining Corp. LUN-T $6.07 8.14 1.98%
TFI International Inc. TFII-T $42.96 19.82 1.96%
Fairfax Financial Holdings Ltd. FFH-T $672.67 21.86 1.93%
Badger Daylighting Ltd. BAD-T $28.19 15.57 1.92%
Empire Co. Ltd. EMP.A-T $23.05 19.84 1.91%
Loblaw Cos Ltd. L-T $63.25 20.13 1.87%
Metro Inc. MRU-T $40.10 16.22 1.80%
Tourmaline Oil Corp. TOU-T $22.30 20.27 1.79%
Imperial Oil Ltd. IMO-T $42.83 38.80 1.77%
Open Text Corp. OTEX-T $44.60 33.14 1.77%
Methanex Corp. MX-T $97.28 15.35 1.76%
Stantec Inc. STN-T $31.92 24.14 1.72%
Saputo Inc. SAP-T $38.47 17.37 1.72%
Uni-Select Inc. UNS-T $22.05 13.52 1.68%
Cott Corp. BCB-T $18.85 50.28 1.65%
Cenovus Energy Inc. CVE-T $12.10 n/a 1.65%
Canadian National Railway Co. CNR-T $111.85 22.38 1.63%
CAE Inc. CAE-T $24.73 21.04 1.62%
Maple Leaf Foods Inc. MFI-T $33.12 23.81 1.57%
CES Energy Solutions Corp. CEU-T $3.81 22.37 1.57%
Gildan Activewear Inc. GIL-T $37.00 16.70 1.57%
Franco-Nevada Corp. FNV-T $80.66 50.53 1.55%
Martinrea International Inc. MRE-T $12.02 5.55 1.50%
Toromont Industries Ltd. TIH-T $63.23 31.11 1.46%
Cascades Inc. CAS-T $11.08 14.04 1.44%
Brookfield Asset Management Inc. BAM.A-T $54.96 14.61 1.42%
OceanaGold Corp. OGC-T $3.71 9.00 1.40%
Agnico Eagle Mines Ltd. AEM-T $45.29 59.73 1.26%
West Fraser Timber Co. WFT-T $66.18 5.86 1.21%
Stella-Jones Inc. SJ-T $41.92 17.80 1.15%
ECN Capital Corp. ECN-T $3.47 15.89 1.15%
Barrick Gold Corp. ABX-T $15.01 25.98 1.04%
Enghouse Systems Ltd. ENGH-T $75.00 35.60 0.96%
MTY Food Group Inc. MTY-T $62.30 23.04 0.96%
Canadian Pacific Railway Ltd. CP-T $269.66 22.79 0.96%
Pan American Silver Corp. PAAS-T $19.11 21.29 0.95%
CCL Industries Inc. CCL.B-T $54.93 20.67 0.95%
Richelieu Hardware Ltd. RCH-T $26.80 22.49 0.90%
Linamar Corp. LNR-T $55.10 6.14 0.87%
Quebecor Inc. QBR.B-T $26.45 17.58 0.83%
Yamana Gold Inc. YRI-T $3.28 60.50 0.79%
Enerplus Corp. ERF-T $15.28 18.69 0.79%
GoldCorp Inc. G-T $13.20 n/a 0.79%
Waste Connections Inc. WCN-T $98.50 38.84 0.74%
FirstService Corp. FSV-T $102.58 46.36 0.68%
Teck Resources Ltd. TECK.B-T $29.40 6.67 0.68%
BRP Inc. DOO-T $53.49 19.15 0.67%
Alimentation Couche-Tard Inc. ATD.B-T $61.04 17.27 0.66%
Brookfield Business Partners BBU.UN-T $53.76 n/a 0.60%
Constellation Software Inc. CSU-T $879.90 49.85 0.59%
Hudson's Bay Co. HBC-T $9.45 n/a 0.53%
Encana Corp. ECA-T $15.30 20.86 0.51%
Kirkland Lake Gold Ltd. KL-T $24.59 17.96 0.49%
Alamos Gold Inc. AGI-T $6.02 74.92 0.43%
Boyd Group Income Fund BYD.UN-T $122.00 41.11 0.43%
Dollarama Inc. DOL-T $37.58 23.67 0.43%
Onex Corp. ONEX-T $85.78 11.22 0.41%
Hudbay Minerals Inc. HBM-T $6.20 5.38 0.32%
Winpak Ltd. WPK-T $45.43 20.86 0.26%
Colliers International Group CIGI-T $86.12 27.51 0.15%
First Quantum Minerals Ltd. FM-T $14.37 44.21 0.07%

Source: Bloomberg, Oct. 10, 2018

Norman Rothery, PhD, CFA, is the founder of StingyInvestor.com.

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