What are we looking for?
Canadian dividend-paying small caps.
The screen
Canadian small caps have had a bumpy ride this year, feeling the pain in the second half especially. Year-to-date, the S&P/TSX small cap total return index has posted a loss of 12.5 per cent and the median stock in the index is down 9.1 per cent so far. If we only look at dividend-paying firms in the index, however, we can see some improvement. Excluding non-dividend-payers, the index would only be down approximately 7 per cent this year.
In order to search for smaller dividend-paying companies that may offer better returns with possibly less volatility, my colleague Lawrence Ullman and I used Morningstar CPMS to rank Canadian dividend-paying small caps with the best mix of:
- return on equity;
- asset turnover, that is, the ratio of sales to total assets;
- long-term debt to equity;
- three-month consensus earnings estimate revision (no worse than minus 15 per cent);
- short interest as a percentage of shares outstanding (lower is better for this screen);
We limited results to companies with market caps between $100-million and $1.5-billion, dividend yields above 2 per cent and dividend payout ratios less than 100 per cent.
More about the Ullman Group
The Ullman Group is an independent provider of strategic private capital management services to high-net-worth individuals, corporations, endowments, charities and foundations.
What we found
We used CPMS to perform a back-test starting Oct. 31, 2005, selecting an equally weighted portfolio of the top 15 stocks. Stocks would have been replaced if they fell outside of the top 40 per cent of the universe.
Over the full period, this strategy would have generated an annualized total return of 16.6 per cent compared with 5.6 per cent for the S&P/TSX composite total return index and 1.3 per cent for the S&P/TSX small cap total return index.
The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Ltd. or its affiliates. Investors should contact a professional or do their own research before investing in any of the stocks shown here.
Craig McGee, CFA, is a portfolio manager and Lawrence Ullman, MBA, is a director, wealth management and portfolio manager with the Ullman Group at Richardson GMP in Toronto.
Richardson GMP Limited is a member of Canadian Investor Protection Fund. Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.