What are we looking for?
My associate Allan Meyer and I love dividends. We believe dividends will remain an important investment theme in the coming years and are a critical component of return in our clients' portfolios. We thought we would take a closer look at Canadian dividend payers using our investment philosophy focused on safety and value.
The screen
We started with Canadian-listed equities with a minimum market capitalization of $10-billion. Some investors, particularly retirees, have a thirst for income. Allan and I like to get paid while we wait, and dividends generally reflect safety and stability.
Dividend yield is based on the current share price divided by the projected dividend payments over the next year. All securities yield 4 per cent or more. Payout is the dividend payment divided by earnings. A lower number is preferred and implies the dividend is safer. It could also signal a future dividend increase, while the opposite is true for a number over 100.
Price to earnings is the current share price divided by the earnings per share. It is a valuation metric; the lower the number, the better the value. Earnings momentum is the change in annual earnings over the past quarter. A positive number indicates earnings are increasing, while the opposite is true for a decrease. It is important to note that earnings-based ratios are one of many ways to evaluate a company and may not be the most appropriate for all companies on this list.
Lastly, we looked at debt to equity. A smaller ratio indicates a company has lower levels of debt and can be viewed as a sign of safety. A number under 100 implies a company has enough equity to pay its debt obligations. Generally, we prefer companies under 150, but this varies across industries and sectors, as many other metrics do. Banks for example, can generally afford higher debt levels.
What did we find?
Manulife looks interesting as it has a low payout ratio and debt level, attractive value and positive earnings momentum.
Exchange-traded funds (ETFs) are an option for investors who prefer to diversify away from individual security risk. Bank of Montreal and First Asset Capital Corp. offer Canadian dividend ETFs, symbols ZDV and FDV respectively.
Investors should contact an investment professional or conduct further research before buying any of the securities listed here.
Sean Pugliese, CFA, is an investment portfolio manager at Wickham Investment Counsel, helping individuals, families and other investors.