What are we looking for?
Canadian equities trading at reasonable valuations, paying attractive dividends and generating the excess cash necessary to reinvest in their businesses.
The screen
Dividends are an important component of total return that cannot be ignored. Indeed, over the past five years, dividends have represented 43 per cent of the S&P/TSX composite index's total return.
We screen for companies providing a sustainable and consistent income stream with the potential to grow dividends, while maintaining the versatility needed to invest in their business through production expansion, new product development or debt reduction. Our screen is based on:
- Price-to-earnings ratio less than the S&P/TSX, which has a P/E of 19;
- Dividend yield greater than 2 per cent;
- Positive predicted net income growth over the next 12 months;
- Free-cash-flow yield greater than dividend yield (operating cash flows after accounting for capital expenditures are greater than the amount needed to sustain current dividends);
- Five-year average dividend payout ratio (percentage of company’s earnings paid out as dividends) not exceeding 60 per cent.
More about Thomson Reuters
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What did we find?
Our screen yields 10 companies (ranked by market cap), mainly represented by the financial sector. Although this was not part of our screening criteria, it is worth noting that dividends accounted for an average of 30 per cent of total return across the screen.
This commentary does not provide individualized advice or recommendations. Investors should conduct further research before investing.
Khaled Eniba works in the financial and risk unit of Thomson Reuters and specializes in banking and research.