What are we looking for?
Sustainable dividends from companies ready to defy any cool-down in the Toronto stock market.
The screen
The S&P/TSX composite index seems poised to reclaim its all-time high – 15,943 – set in February. Still, compared with the first half of 2017, Canada's economic growth looks to be slowing.
To mitigate the impact of any possible correction, we think investors should keep the bulk of their holdings in dividend payers with low forward price-to-earnings ratios of 15 or less – despite the September surge for the S&P/TSX composite index. Those companies should also have sound balance sheets, along with steady sales and profits.
We searched for Canadian companies that meet those criteria. (Generally, they won't fall quite so far in a market downturn and will bounce back faster.)
We then applied our TSI Dividend Sustainability Rating System to the dividend payers among them. We award points to a company based on eight key factors:
- One point for five years of continuous dividend payments – two points for more than five years.
- Two points if those payments have been raised in the past five years.
- One point for management’s public commitment to dividends.
- One point for operating in non-cyclical industries.
- One point for limited exposure to 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 to cover dividend payments.
- One point if the company’s a leader in its industry.
Publicly traded companies with 10 to 12 points have the highest sustainability rating, while those with seven to nine points are above average; four to six points, average; and one to three points, below average.
More about TSI Network
TSI Network is the online home of the Successful Investor Inc. – Pat McKeough's widely followed group of Canadian investment newsletters. They include our award-winning flagship newsletter, the Successful Investor, which covers TSX index stocks. The TSI Dividend Advisor is a 2016 addition. TSI Network is also affiliated with Successful Investor Wealth Management.
What we found
Our TSI Dividend Sustainability Rating System generated 12 stocks with P/Es under 15 and with highly dependable dividends. It's no surprise Canada's Big Five banks made the list. Aside from those perennial favourites, the remaining seven span a wide range of industries: steel distributor Russel Metals, auto-parts maker Linamar, insurer Great-West Lifeco, fund manager IGM Financial, retailers Canadian Tire and Leon's Furniture, and printing and packaging firm Transcontinental Inc.
We advise investors to do additional research on any investments we identify here.
Scott Clayton, MBA, is senior analyst for TSI Network and associate editor of TSI Dividend Advisor.