What are we looking for?
Large-cap Canadian stocks with strong dividend yields combined with low volatility.
October and November were tough months for both Canadian and U.S. markets with all the major indexes diving 8 per cent to 14 per cent from the start of October highs. This week, markets shot ahead on Monday, only to give back all their gain and more on Tuesday. With the arrest in Canada of a top executive of Chinese telecom Huawei Technologies Co. Ltd., and a yield curve on the verge of inversion, there is no sign that volatility will abate any time soon. Are there less stressful stock alternatives for investors seeking stability and income?
The screen
We will be using Trading Central Strategy Builder to search for large-cap Canadian stocks with low historical volatility combined with strong and secure dividend payouts.
We will start by screening for Canadian stocks with a market capitalization in excess of $10-billion. This will enable us to focus exclusively on the larger, more stable and established companies in the market.
To find stocks with attractive dividends, we will also screen for companies with dividend yields of 2.5 per cent or more. To ensure these dividends are secure, even in the event of a downturn in the economy, we will also filter for dividend coverage ratios of 125 per cent or more. Dividend coverage is defined as the company’s earnings per share divided by its dividend payout over the past 12 months. Higher dividend coverage ratios are preferred and demonstrate a company’s ability to pay current and future dividends.
Finally, to select companies with low volatility, we will filter for beta between zero and 0.5. Beta measures the price correlation of a security compared with the entire market. Stocks with beta in this range exhibit a much smaller correlation to overall market moves.
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What we found
Topping our list is Power Financial Corp. with a beta of 0.38 and a dividend yield of 6.1 per cent, the highest on our list. The very high yield is in part because of the tough run the stock price has had in 2018, down 21 per cent on the year.
Our list has an outsized representation from the financial services sector, but two utility stocks also make the grade. Hydro One Ltd. and Fortis Inc. both exhibit extremely low volatility (beta less than 0.1) and have dividend yields in excess of 4 per cent. In terms of one-year return, Fortis has been more or less flat on the year whereas Hydro One has declined more than 10 per cent.
Although it is designed for safety and low volatility, the strategy described also back-tested very well. Using a five-year historical period with quarterly rebalancing, the screen delivered an 8.4-per-cent annualized return compared with 3.6 per cent for the S&P/TSX 60 Index and 2.7 per cent for the S&P/TSX Composite Index.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Trading Central in respect of the investment in financial instruments. Investors should conduct further research before investing.
Peter Ashton is vice-president of customer success at Trading Central.