What are we looking for?
Canadian and U.S. companies with highly sustainable dividends – despite a significant earnings slide in 2016.
The screen
A big drop in profit can rightfully signal danger – the loss of a major customer or overdependence on a declining market, for example. But income investors often let it overshadow a company's fundamental strength and, more important, its dividend sustainability.
We started with our extensive list of dividend-paying Canadian and U.S. companies, before singling out those with a significant profit slide in 2016.
We then pinpointed companies with the business strength to handle earnings volatility and sustain – or even raise – their dividends.
Our TSI Dividend Sustainability Rating System awards points to a stock based on eight key factors:
- One point for a long-term (at least five years) record of dividends – two points for more than five years of continuous payments;
- Two points if the company has raised the payment in the past five years;
- One point for management’s public commitment to maintain dividends;
- One point for operating in a non-cyclical industry. Profits at businesses in cyclical industries, such as oil and mining, tend to move up and down with the economy. Sharply lower earnings could prompt a company to cut its dividend to conserve cash;
- One point for limited exposure to foreign currency exchange rates and freedom from political interference;
- Two points for a strong balance sheet, including manageable debt and adequate cash;
- Two points for a long-term record of positive earnings and cash flow sufficient to cover dividend payments;
- One point if the company is a leader in its industry.
Companies with 10 to 12 points have the most secure dividends, or the highest sustainability rating.
Those with seven to nine points have above-average sustainability; average sustainability, four to six points; and below-average sustainability, one to three points.
More about TSI Network
TSI Network is the online home of The Successful Investor Inc. – the group of widely followed Canadian investment newsletters by editor and publisher Pat McKeough.
They include our award-winning flagship newsletter, The Successful Investor.
The TSI Dividend Advisor is the latest addition to the family. TSI Network is also affiliated with Successful Investor Wealth Management.
What we found
Our TSI Dividend Sustainability Rating System generated five stocks best positioned to turn around earnings and maintain dividends.
Finning International Inc., for example, saw its sales of Caterpillar equipment to miners in Canada, South America and Britain drag down earnings in 2016.
But its dividend remains highly sustainable. All five of our top stocks appear in the accompanying table.
We advise investors to do additional research on any investments we identify here.