What are we looking for?
Large-cap Canadian stocks with good dividend yields and strong track records of dividend growth.
The extreme stock-market volatility in early 2016 has many investors looking for safer alternatives to the high-flying stocks that led the market in 2015. Dividend stocks that lagged last year because of the prospect of increasing interest rates are looking interesting again. With interest-rate increases looking less likely, particularly in Canada, dividend stocks are looking like strong alternatives for investors seeking safety and reduced volatility.
The screen
We will be using Recognia Strategy Builder to search for Canadian stocks with good yields and a history of dividend growth.
We begin by setting a minimum market-cap threshold of $10-billion. We wish to focus on larger, more established companies in the market due to their inherent quality and stability.
Next, we will use three dividend-related criteria to select stocks. First, we will select only companies with dividend yields over 3 per cent. Ensuring our selections are able to maintain their dividend payouts is also important – we will screen for companies with a dividend-coverage ratio of at least 250 per cent. Dividend coverage is defined as the earnings per share over the past year divided by the dividend paid in the same period. A higher dividend-coverage ratio is preferred as it means more earnings are available to maintain or even raise the dividend.
Finally, we will look for companies with a track record of raising their dividend payments over time. We will look for a five-year average dividend growth rate of at least 5 per cent a year.
More about Recognia
Recognia is a global leader in automated quantitative analysis and engagement solutions for retail online brokers and institutions. Recognia's product suite provides actionable trading ideas based on technical and fundamental research covering stocks, ETFs, indexes, forex, options and commodities.
What did we find?
Cenovus Energy tops our list with a 5.9-per-cent dividend yield and 60.8-per-cent five-year dividend growth rate. With energy stocks being beaten down over the past 18 months, many integrated oil companies now find themselves with extremely high yields. Cenovus's dividend looks fairly secure given its 333-per-cent dividend-coverage ratio and is further aided by the slow turnaround in crude prices now under way.
National Bank of Canada is one of four Canadian banks on our list. National Bank provides the highest dividend yield of the four at 5.5 per cent and also has the highest five-year dividend growth rate.
Historical performance
Recognia Strategy Builder provides a backtesting capability to evaluate how well an investing strategy would have worked in the past. Using a five-year historical period with quarterly rebalancing, the screen described had an 11.0-per-cent annualized return compared to minus 2.1 per cent for the S&P/TSX 60 index and minus 1.4 per cent for the S&P/TSX composite.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia Inc. in respect of the investment in financial instruments. Investors should conduct further research before investing.
Peter Ashton is vice-president of retail and self-directed investing at Recognia Inc.