Dividend All-Stars: How we did it - MoneySense

Dividend All-Stars: How we did it

Looking for the best dividend stocks in Canada? Here’s how we identify dividend payers worthy of the All-Star label

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The Grades

We grade each of Canada’s largest dividend stocks based on its ability to provide generous income to investors for a reasonable price. While the process might sound complicated, we boil everything down to an easy to use letter-grade that sums up a stock’s investment potential.

Those with the best prospects are awarded As and solid candidates get Bs. We think both are worthy of your consideration. Middle of the road options get Cs while those in need of improvement get Ds or even Fs.

We believe the Dividend All-Stars offers a logical and consistent approach to selecting dividend stocks that isn’t influenced by feelings or fads. We don’t rely on our gut instincts or happy visions of the future when evaluating firms. Instead, our results are based entirely upon the numbers. Our opinions about a company don’t enter into it.

It’s important to emphasize that the grade a stock gets does not reflect the character of a company, its management, or employees. After all, it is possible for a great business to have poor prospects as an investment when its stock is too expensive. By the same token, mediocre businesses in the market’s bargain bin can provide highly satisfying returns.

We start by mining facts and figures from the Bloomberg database and focus on the largest firms in Canada based on market capitalization. (Market capitalization is the market value of a company and is calculated by multiplying its stock price by the number of shares it has.) We then remove firms that lack the sort of detailed financial information we need for our analysis. The grades are awarded based on yield, reliability, and value.

Yield

We think investors should be paid to take on the risk of stock ownership and give top marks to firms with generous dividend yields. We also reward businesses that have grown their dividends over the last five years because dividend growth is an indicator of financial strength.

Reliability

We want some assurance that a company’s dividend is sustainable. (Indeed, sometimes an extraordinarily high yield can be a warning sign, which is one reason why we employ a bevy of additional tests.) We first reward stocks that earn more than they pay out in dividends. We also give additional marks to those with little debt compared to their peers. After all, companies staggering under heavy debt loads have a habit of folding during hard times.

Value

On the value front we want to be able to buy lots of assets for a low price. As a result, better grades go to companies with moderate-to-low price-to-book-value (P/B) ratios. This number compares the market value of a company to how much cash you could theoretically raise by selling off the company’s assets (at their balance-sheet values) and paying off its debts. Reasonable P/B ratios provide some assurance that you’re not paying much more for a stock than its parts are worth. Similarly, we also like profitable stocks with modest price-to-earnings ratios.

Putting all these factors together we arrive at the final grades for the largest 100 dividend stocks in Canada.

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Norm Rothery, CFA, PhD, tweets as @NormanRothery. He may hold some of the securities mentioned in this article.

Illustration by Sam Irland

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