Friday, 29 April 2011

Which Canadian Stocks with Growing Dividends? - The High Yielders

Income-seeking investors are naturally keen on stocks that pay dividends, especially ones that combine a history of consistently rising dividend with high dividend yield (dividend as a percent of stock price). Such stocks are often termed dividend achievers or aristocrats. Some might think those stocks to be automatic winners. Today we look at Canadian stocks that currently fit that bill to see how true that might be.

Finding the Current Canadian Dividend Achievers
In doing our search we first came across blogger Passive Income Earner's list from January 2011. To find a current list at any time, a convenient source is the holdings of Claymore Canada's S&P TSX Canadian Dividend ETF (symbol CDZ , MER 0.66%) which selects only companies that have increased dividends for at least five consecutive years. Then we sorted the list to select the "high" dividend payers, which we define simply as anything more that the TSX Composite average yield of 2.4%, a figure obtained on the TMX Money Indices page. That left less than half the original number of stocks, whose yields were all 3.0% or more. (Next week, we'll look at and compare the remainder of the stocks in the list, whose yields fall below 3%.) The resulting list is below.

Lesson #1 - Dividend achievers exist in a variety of sectors, everything from the expected utilities and pipelines to retailers, oil companies, financial companies, telecoms, media and transportation.

Is the Dividend a) Safe and b) Likely to Continue Rising?
As we all should know, the future may not repeat the success of the past. Our table of comparison above shows that for several of the companies, various factors may threaten the dividend, such as:
  • large debt load and weak coverage of interest on that debt, which must be paid before dividends
  • dividend payouts that exceed the earnings of the company
  • falling earnings that may not generate enough cash to fund dividend increases
Lesson #2 - Some companies may not be able to sustain further dividend rises

Two companies look vulnerable to an end to dividend increases, if not outright dividend cuts - Enbridge Income Fund Holdings (symbol ENF, not to be confused with Enbridge Inc, symbol ENB, which looks quite solid) and Thomson Reuters Corp (TRI).

Based on the combinations of the factors (green numbers in the table), several companies look to be well capable of continued increases in their dividends:
  • Canadian Real Estate Investment Trust (REF.UN)
  • Corus Entertainment Inc B (CJR.B)
  • Canadian Utilities Inc (CU)
  • Rogers Communications Inc B (RCI.B)
  • Intact Financial Corporation (IFC)
  • Transcontinental A Subvtng (TCL.A)
  • Canadian National Railways (CNR)
  • Imperial Oil Ltd (IMO)
Are the Stocks Too High Priced?
The dividend may be safe and even likely to rise further, but perhaps the stock is over-priced and its price risks falling, leading to capital loss for the investor. This factor is the hardest to assess and could benefit from more detailed examination of the company than is done here but we can draw tentative indications.

Lesson # 3 - The price of some of these stocks appears attractive and others not at all.

Some of the indicators that suggest stocks which may be worth a detailed look include: stock price to earnings ratio that is lower than the TSX Composite average of 19.7; price to company cash flow that is low; healthy return on equity and on assets; and growing earnings per share. Stocks that look good on this preliminary basis of value include:
  • North West Company Inc (NWC as of May 2nd - before that NWF)
  • Telus Corp (T)
  • Canadian Real Estate Investment Trust (REF.UN)
  • Rogers Communications Inc B (RCI.B)
  • Corus Entertainment Inc B (CJR.B)
  • Shaw Communications Inc B (SJR.B)
  • Canadian Utilties Inc (CU)
  • Transcontinental A Subvtng (TCL.A)
  • Intact Financial Corporation (IFC)
The not-so-attractively priced stocks:
  • Enbridge Income Fund (ENF)
  • Thomson Reuters Corp (TRI)
Have the Same Companies been the Top Canadian Dividend Achievers Year After Year?
If there was any doubt of the need to be cautious in assuming that the current companies with consistent records of dividend increases will keep doing so, it is only necessary to see how past lists compare. We managed to find similar lists from 2007 (from the Globe and Mail here and here) and 2009 (from the Million Dollar Journey blog here)and only four companies have managed to qualify in all three years' lists. In the comparison table below, we highlight in green cells the stocks that appear in every list, in pale yellow the stocks in the 2009 and 2011 lists and in pale blue those in the 2007 and 2009 lists.

Here are the current dividend longevity champions:
  • AGF Management Ltd B (AGF.B)
  • Enbridge Inc (ENB)
  • Canadian National Railways (CNR)
  • Imperial Oil Ltd (IMO)
CNR and IMO both have modest dividend yields, though the accumulated increases over the decade or so (the total time straddled by all the lists) that they have been raising dividends would have produced a handsome income for shareholders of long duration.

Perhaps the most interesting feature of the 2007 to 2011 evolution is the falling away of the banks and insurance companies after the financial crisis. The big question - will any or all come back to qualify again for the dividend achiever list? A few banks have announced dividend increases recently. Perhaps the future won't be like the recent past, only the distant past?

Lesson # 4 - The present is very little like the past and the future may be quite unlike the present as well. Such lists as Canadian Dividend Achievers can be a good starting point to find promising dividend-generating income stocks but are not a foolproof method of picking them.

Disclaimer: this post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.

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