Canada’s top 20 dividend stocks

Canada achieved a fourth successive quarter of double-digit dividend growth, and continued to outgrow the U.S., mainly due to pay-outs from energy companies, today’s Janus Henderson Global Dividend Index report for Q2 found.

Canadian companies paid out US$11.1 billion in dividends in the second quarter of 2019, with dividends from financials and energy stocks seeing the fastest increases, while technology and consumer basics lagged.

The top three dividend issuers in the second quarter were Enbridge (ENB) (US$1.11 billion in dividends paid out), RBC (RY) (US$1.089 billion in dividends paid out) and TD Bank (TD)(US$1.008 billion in dividends paid out).

Canada was one of four countries to break all-time records, with the other three being France, Indonesia and Japan. Globally, total dividends reached US$513.8bn in the second quarter, up 1.1% compared to a year ago, a new record, although the rate of growth has slowed, and was, in fact, the slowest for more than two years.

“Global dividends have been growing very quickly over the last two years, so the slowdown we are now seeing is not a cause for concern. The underlying growth rate we expect this year is simply in line with the long-run average, rather than well ahead of it,” Ben Lofthouse, head of global equity income at Janus Henderson said, pointing out that the impact of the global economic slowdown is greater in some parts of the world than others.

This slowdown was in line with Janus Henderson’s forecast, which had already factored in a lower rate of growth this year. The forecast is unchanged at US$1.43 trillion, an increase of 4.2% on a headline basis, or 5.5% on an underlying basis.

Economic cycle driving dividends

“At this stage in the economic cycle, we are seeing a moderation of dividend increases across a broad range of companies, and the number of cuts is on the rise too,” Lofthouse says.

In Canada, for example, troubled engineering firm SNC-Lavalin Group (SNC) cut its dividend by 80% in August this year.

CIBC’s Ian de Verteuil points out that companies pay a very severe price if they cut their dividends, while they also pay a price if there's uncertainty around whether they can actually maintain the dividends. “The problem is that there is an appropriate dividend for the volatility of your business. No business – very few businesses – have true stability through an economic cycle. Dividend policy needs to be set on the basis of what's the right level of dividend for my business, what's the right level of dividend for the cyclicality of my business,” he says.

Morningstar Canada’s head of investment management Michael Keaveney says that investors should look beyond the headline dividend yield, to how sustainable the dividends and growth of dividends are, and the total payouts, which include the effects of share repurchases. “Indeed, in the long run, our research indicates that the cash flows that corporations supply, including payouts in the form of buybacks as well as dividends, are the ultimate drivers of stock returns,” he says.

Selecting the right dividend stocks

How do you pick stocks that might make sense? When we look for stocks, we look for competitive advantage, margin of safety, and valuation. So, we looked for stocks that have an economic moat, or a sustainable competitive advantage. We also added in our “star rating”. The rating is determined by three factors: a stock's current price, Morningstar's estimate of the stock's fair value, and the uncertainty rating of the fair value. The bigger the discount, the higher the star rating.

On top of our ratings, we added the dividend payout ratio, which measures how much of a company’s annual earnings are used to pay dividends. A ratio of 1:1 indicates that a firm is giving back all its profits to shareholders. We also look at the historic yield (trailing 12 months) and compare that with the forward yield.

Here’s a look at the 20 S&P/TSX Composite stocks with the highest historic yield, and also have a wide or narrow economic moat. Only three of these stocks are undervalued – Enbridge (ENB), CIBC (CM) and National Bank of Canada (NA). Of these three, only one is a rare triple-threat: high yield, wide moat, and undervalued share price:

Morningstar Direct Data as of August 14, 2019