What are we looking for?
High-yield Canadian stocks bolstered by the downward trajectory of interest rates.
The screen
The Bank of Canada’s decision last week to lop another 50 basis points from its overnight rate was followed this week by the U.S. Federal Reserve’s move to cut 25 basis points from its own. Regardless of the relative size, falling interest rates tend to hurt the appeal of fixed-income investments like GICs while bolstering the attraction – and the dividend yields – of income stocks.
High-yield stocks from the financial sector are among the biggest beneficiaries of that phenomenon, as falling interest rates lower what they pay out to depositors and so lift their profit spreads. Historically, that’s been enough to drive up their share prices and dividend yields. Utility stocks benefit in much the same way as falling interest rates cut the carrying costs of their high debt loads. That tends to lift their stock prices and their yields.
We think now is a good time to buy the best of high-yield stocks – not just for their current sustainable dividends but also for their prospects.
Our search started with a list of dividend-paying Canadian financials and utilities. We then homed in on those with strong prospects for earnings growth before applying our Dividend Sustainability Rating system. It awards points to a stock based on key factors:
- One point for five years of continuous dividend payments – two points for more than five;
- two points if it has raised the payment in the past five years;
- one point for management’s commitment to dividends;
- one point for operating in non-cyclical industries;
- one point for limited exposure to foreign currency 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 dividends;
- one point if the company is an industry leader.
Companies with 10 to 12 points have the most-secure dividends, or the highest sustainability. Those with seven to nine points have above-average sustainability; average sustainability, four to six points; and below average sustainability, one to three points.
More about TSI Network
TSI Network is the online home of The Successful Investor Inc. – the group of widely followed Canadian investment newsletters by editor and publisher Pat McKeough. They include our award-winning flagship newsletter, The Successful Investor, and the TSI Dividend Advisor. TSI Network is also affiliated with Successful Investor Wealth Management.
What we found
Our TSI Dividend Sustainability Rating System generated seven stocks: Bank of Nova Scotia BNS-T and Royal Bank of Canada RY-T are Big Five stalwarts. Pipeline operators TC Energy Corp. TRP-T and Enbridge Inc. ENB-T, both based in Calgary, have strong cash flow and growth projects to keep dividends rising. Power utilities Fortis Inc. FTS-T, headquartered in St. John’s, and Calgary-based Canadian Utilities Ltd. CU-T are both prospering in their markets. And finally, Vancouver’s Telus Corp. T-T continues to profit from selling telecom services to Canadians – profits now spurred by the completion of multiyear upgrades to wireless and fibre-optic networks.
Scott Clayton, MBA, is senior analyst for TSI Network and associate editor of TSI Dividend Advisor.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.