Canadian dividend growers for a higher-yield environment

What are we looking for?

Canadian-listed dividend-paying companies that combine attractive income with consistent dividend growth, solid fundamentals and positive share-price momentum.

As of Sept. 8, the five-year Government of Canada bond yield stood at 3.48 per cent and the 10-year yield at 3.84 per cent, up 56 and 46 basis points, respectively, from Jan. 9. (There are 100 basis points in a percentage point.) With government bonds offering increasingly competitive yields, the screen looks beyond headline dividend yield to identify companies that have demonstrated an ability to increase their distributions over time while maintaining a favourable Trading Central Quantamental Rating.

The screen

Using Trading Central Strategy Builder, we began by setting a minimum market capitalization threshold of $2-billion, focusing on larger, more established Canadian companies with greater scale and financial resources.

We applied Trading Central’s Quantamental framework, a systematic 20-factor model combining valuation, growth, quality, momentum and income, requiring a rating of at least 50 out of 100. The same proprietary framework underpins the Solactive TC Quant CA 50 Index, tracked by the Trading Central Quant Canada 50 Equity Index ETF (TCCA), which provides systematic exposure to 50 high-scoring Canadian companies.

To focus on income and dividend growth, we required a minimum dividend yield of 2 per cent and a five-year average dividend growth rate of at least 5 per cent. These criteria help identify companies offering current income while also demonstrating an ability to increase their distributions over time.

We also required an earnings yield of at least 5 per cent, adding a valuation discipline to the screen. For companies with positive earnings, this is roughly equivalent to a price-to-earnings ratio of 20 or less.

Finally, we required positive 52-week price performance, favouring companies that have generated positive market momentum over the past year.

We have also included year-to-date price performance and stock price for your reference.

More about Trading Central

Trading Central is a global leader in financial market research and investment analytics for retail online brokers and institutions. Its product suite provides actionable trading ideas based on technical and fundamental research covering stocks, exchange-traded funds, indices, forex, options and commodities. Strategy Builder, our stock screener is available through leading retail brokers in Canada and worldwide.

What we found

Topping our list is Canadian Natural Resources Ltd. (CNQ-T), one of Canada’s largest oil and natural gas producers and a holding in the Trading Central Quant Canada 50 Equity Index ETF (TCCA). The company has a market capitalization of about $146-billion, a dividend yield of 3.53 per cent and a five-year average dividend growth rate of 20.4 per cent. Canadian Natural also has an earnings yield of 7.93 per cent and a Trading Central Quantamental Rating of 59. The stock has gained 50.5 per cent year-to-date and 64 per cent over the past 12 months, combining income and dividend growth with strong share-price momentum.

Also standing out is Whitecap Resources Inc. (WCP-T), another holding in TCCA. Whitecap has been the strongest performer on our list, advancing 60 per cent year-to-date and 78.1 per cent over the past year. The oil and gas producer yields 3.9 per cent and has generated a five-year average dividend growth rate of 32.19 per cent. Its Quantamental Rating of 63 is also among the highest in the screen, while an earnings yield of 5.99 per cent meets our valuation requirement.

Royal Bank of Canada (RY-T) is the largest company to qualify, with a market capitalization of approximately $395-billion. Canada’s largest bank offers a dividend yield of 2.47 per cent and a five-year average dividend growth rate of 7.94 per cent, while its earnings yield stands at 5.55 per cent.

Trading Central Strategy Builder provides a backtesting capability to evaluate how an investment strategy would have performed historically. Using a five-year historical period with quarterly rebalancing, the screen described above generated an annualized return of 15 per cent, compared with an annualized return of 12 per cent for the S&P/TSX Composite Index over the same period.

The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Trading Central in respect of investing in financial instruments. Investors should conduct further research before investing.

Gary Christie is head of North American research at Trading Central in Ottawa.