Canada’s Best Dividend Stocks 2021

Overview Top 100 Dividend Stocks Past Performance Methodology

What a difference a year makes. Around this time last in 2020, we warned about the difficulty of finding cheap dividend stocks. Markets were strong but there were concerns, with investors preoccupied with fears over Brexit, rising U.S.–China trade tensions and slowing earnings growth.

At that time, dividend stocks were seen to offer some stability amid all that turbulence. Yet, few could have anticipated the havoc that COVID-19 would bring into every facet of our lives. Now, more than a year since the deadly virus was identified in Wuhan, China, around the world it continues to sicken and kill people of all ages, upend businesses and disrupt investment plans. 

Still, for all of the market volatility of 2020, if you were a patient investor and had a balanced portfolio, there is a good chance you finished the year more or less where you started—or perhaps even a bit ahead. That’s remarkable, given major markets like the S&P/TSX Composite and the S&P 500 both lost more than a third of their value in the early months of the pandemic. 

So, did dividend stocks provide that expected buffer? Not as much as anyone would have liked. “Many dividend stocks proved not to be as defensive during the market downturn as most would have thought,” says Don Newman, a portfolio manager at Fidelity Investments Canada who oversees the $2.2-billion Fidelity Dividend Plus Fund. Put simply, companies experienced a dramatic shift in their business in 2020, unlike in a typical recession, where economies gradually slow down. 

“This challenged many companies’ balance sheets and even led to dividend cuts for those with too much debt,” Newman says. 

As most of the market retreated, a subset of companies, particularly those focused on video calls, digitization and nesting, with the likes of home furnishing and renovations, benefitted from the shift to work from home. Tech was the big winner, particularly on the tech-heavy Nasdaq, which is made up of mostly non-dividend payers, says Oscar Belaiche, who helps oversee $18 billion as the head of equity income team at Dynamic Funds. 

There’s still a strong case for dividend stocks

While 2020 was a difficult year for dividend investing, there is a strong case to have them in your portfolio now. As Belaiche notes, fixed-income investments aren’t as attractive right now, especially if you’re looking to create an income stream. The spread between dividend yields and bond yields is close to the highest it has ever been in Canada. That, coupled with the dividend tax credit and the chance for capital appreciation, makes dividend-paying companies more attractive over other income-producing investments. 

To illustrate, Belaiche offers up the following example: If you want to generate $40,000 a year pre-tax and are earning only 0.25% in a high-interest savings account, then you’d need to have a portfolio of $16 million. With a dividend yield of 5%, you’d need only $800,000 to earn the equivalent, he explains. 

This 2021 edition of the Dividend All-Stars looks dramatically different from last year’s. Gone are the industrial and energy companies that, while offering only modest dividends, had strong balance sheets, were attractively priced and a track record of increasing their payouts. Companies like Methanex, which earned an A rating in 2020, don’t even crack the top 100 this year.  

And if you salivate over high yields, you’ll undoubtedly be pleased to know that the average indicated yield on the A graded stocks this year sits at 5.2%, a full percentage point above last year’s top picks. Each of the stocks that earned top marks this year saw their yields rise by an average of 60 basis points. When you sift through this year’s full Dividend All-Stars report, you’ll find no shortage of high-yield stocks. Almost one in four companies has a yield above 5%, up slightly from last year. Of course, high yields can also mask underlying problems, putting pressure on the share price. 

As scintillating as high yields can be, the phenomenon underscores just how hard 2020 was for some of these stocks. Remember, a company’s yield will rise as its stock price falls. Only one of the top stocks, Capital Power, had a positive total one-year return last year. Still, despite taking a bruising with the rest of the market last year, all of this year’s top stocks managed to maintain their dividends and have strong balance sheets. 

At times when companies experience this type of pressure, there is a risk that they could cut their dividend. In essence, the list teases out companies paying attractive dividends and that also look reasonably priced. But sometimes stocks are cheap for a reason. Before you make an investment decision, you want to feel out whether the conditions are present to permit those companies to bounce back.

Predicting the risk of dividend cuts

We considered the risk of companies cutting their dividends 13 years ago when we developed the original Dividend All-Stars methodology. While we seek out companies with plump yields, we’re only interested in ones we think can afford to maintain through typical market gyrations. (You can find our detailed Methodology here.)

Last year, of course, was anything but typical. Companies with strong balance sheets that may have navigated a slowdown in the economy were unable to cope with one that came to an abrupt halt, and these businesses were forced to slash their dividends to conserve cash. 

Overall, one in five companies has had to cut their dividend at some point over the past five years. 

In the past, however, the Dividend All-Stars ranking has effectively struck a balance between plum yields, and a company’s ability to maintain and grow its dividend. This approach typically removes many of the oversized yields, although this year the effect was less pronounced as yields are up across the board. 

To round out our ranking, we also want to be sure we’re identifying companies that provide value. Being paid to wait is a favourite trope of dividend investors, but no one wants to end up like Vladimir and Estragon in Waiting for Godot—holding out hope for something that may never arrive. 

Only six stocks are worthy of A-grades this year, all but one of which appeared in the 2020 team of All-Stars, and the majority of which are insurance stocks. The current generationally low interest-rate environment can be a drag on these stocks. 

Here is a summary of this year’s A-list stocks:

MoneySense A-Team

The B-Team, which is a tad larger this year, is also worthy of your attention. Many of the big banks almost squeaked into our A-Team. 

MoneySense B-Team

How to embrace a selloff

In early 2020, the S&P/TSX Composite was in freefall, shedding more than a third of its value in a matter of weeks. As panicked investors ran for the exits, many experienced investors saw a rare opportunity to buy when prices were down. 

Buying stocks when markets are falling can be risky (although, so is selling your holdings when they are in freefall). But it can also provide a great opportunity to dollar-cost average and set yourself up for the recovery. 

Many of my personal holdings struggled early in 2020, although none were hit as hard as Methanex, a company we pegged as one of our top Dividend All-Stars last year. When I initially bought the stock, it was reasonably priced, offered an attractive yield and had a healthy balance sheet. I had also done some of my own research to understand the company’s prospects. Unfortunately, by March, the company lost more than 70% of its value after it slashed its dividend to conserve cash. 

I had to make some decisions. Did I still like the story? And could I afford any more losses if I was wrong? Sensing that the market was particularly harsh on this industrial stock, based on my research and knowing the investment was outside of my core retirement portfolio, the answer for me was yes on both accounts.

Advisors might caution investors against this sort of behaviour because it risks putting good money after bad. In my case, holding onto Methanex was a calculated risk, one I was willing to accept for a chance at a greater upside. 

On April 28, after watching the company’s share price rise for seven consecutive days, I doubled my initial investment. My patience was tested several times. After rising quickly, the stock retreated again, dipping slightly below where I bought in. But, content to wait for a year for my thesis to play out, I left it alone. 

By June, the stock was up more than 50%. By early fall, I had erased my earlier loss and was continuing to watch the investment climb. 

As things played out better than expected, I began to reassess my position. By November, when I was up in the neighbourhood of 100%, I felt it was time to realize some of my gains, so I sold off an amount equal to my initial investment. When the stock surged again in late December, I sold off an amount equal to my initial investment, leaving a balance equal to my two investments. I’m effectively trading the gains now. 

Given the sharp rebound in the market, this strategy could have worked on any number of stocks. This aggressive strategy may not make sense in all scenarios, but you can capture the same advantages by dollar-cost averaging.