The Canadian economy has shown exceptional resilience during the
Great Recession and continues to charge ahead of the U.S. and other
developed economies. However, due to their high exposures to
volatile materials and energy sectors, the nation's leading equity
indices have underperformed their U.S. peers by a large margin.
Still, investors in the pursuit of a meaningful yield can find
plenty of investment opportunities in Canadian dividend stocks.
The Canadian market as a whole has produced lackluster returns
over the past year. S&P/TSX Composite and TSX/S&P 60
indices lost above 3% over that period, compared to a gain of
slightly more than 20% for the S&P 500 and S&P 100 indices.
Dividend stocks have fared pretty well on both sides of the border.
Despite the recent rebound in bond yields, the U.S. Treasury and
Canadian government 10-year bond yields remain below 2%, which
makes high-yield dividend stocks with strong fundamentals
especially attractive investment vehicles for income investors.
In search of sustainable dividends at reasonably high yields,
investors should focus on those companies that pay dividend yields
higher than those on comparable assets and that exhibit stability
and sustainability of earnings and dividend growth over time.
Manageable debt levels, payout ratios below ominous rates and
reasonable valuations are also important variables. Below is an
overview of prospective income plays for investors in pursuit of
attractive yields in Canadian dividend stocks.
First, investors can choose from a number of Canadian banks,
most of which have rock-solid balance sheets and rank among the
safest financial institutions in the world. Five largest Canadian
banks - referred to as the big five - are all members of the
S&P/TSX 60, an index that encompasses about 73% of Canada's
equity market by capitalization. The five largest Canadian banks
all pay dividend yields that are almost double that of the Canadian
government 10-Year bond.
Especially attractive as income investments are the Royal Bank
of Canada (
), Bank of Montreal (
) and Bank of Nova Scotia (
). The Royal Bank of Canada pays a dividend yield of 4.2% on a
payout ratio of 53%. Its forward valuation is below the stock's
historical metrics. Bank of Montreal pays a dividend yield of 4.8%
on a payout ratio of 50%. Based on a forward P/Es, it is trading at
a discount to its peer group and historical ratios. The Bank of
Nova Scotia pays a dividend yielding 3.9% on a payout ratio of 49%.
Over the past five years, these three banks have grown their
dividends at average annual rates of 5.2%, 1.3%, and 5.0%,
Another small-cap financial stock that has seen strong growth is
that of Laurentian Bank of Canada. The bank boasts a dividend yield
of 4.0%, five-year dividend growth of 9.0%, and a payout ratio of
54%. It trades at a forward valuation on par with its peer group
and its own historical averages. The bank reported strong loan
growth (over 9% year-over-year) in its latest quarter and
"excellent" credit quality.
Investors who are wary of the prolonged surge in Canadian
housing prices and mounting consumer debt and who thus prefer to
avoid Canadian financial stocks, can consider investing in the gold
sector. The sector offers value, given the extended slump in prices
over the past year or so. It now looks poised for growth as gold
prices are likely to stage a rebound in the near future. For
instance, Barrick Gold (
) is a good income and value play. It pays a dividend yield of 2.3%
on a low payout ratio of 20%. Its dividend increased at an average
rate of 17% per year over the past year. The stock is attractive
based on valuation, as its trailing and forward P/Es are well below
those of competitors and the company's own historical metrics. An
even more attractive dividend growth play may be IAMGOLD (
). This debt free company pays a dividend yielding 2.2% on a payout
ratio of 24%. The stock has boosted its dividend 30% per year over
the past five years. If it continues to hike its dividend at
similar rates in the future, it will double its payout within three
Aside from the dividend plays in these two sectors, there are
plenty of quality high-yield dividends in the Canadian stock
market. One example is Power Corporation of Canada (PWCDF.PK), an
international management and holding company with operations in
financial, communications, and other service industries. It pays a
dividend yield of 4.4% on a payout ratio of 30%. Its dividend grew
at a rate of nearly 7% per year over the past five year years. The
company's valuation is attractive as its P/E is trading at a
discount to the ratios of the company's rivals and its own
Other examples of high-yield dividend stocks
Calian Technologies (CLNFF.PK), a business and technology
services company in the satellite communications, defense/security,
and high-end telecommunications sectors. The stock pays a dividend
yield of 5.4% on a payout ratio of 61%. The stock has seen robust
dividend growth averaging 20.3% per year over the past five years.
Its P/E is below that of the industry but above the company's own
Killam Properties (KMPPF.PK), a real-estate company engaged in
the ownership, development, and management of multi-family
properties and manufactured home communities in Canada. It pays a
dividend yield of 4.4% on a payout ratio of 47%. The company has
been boosting its dividend at an average rate of 20% per year over
the past five years. It is one of the companies that pay dividends
on a monthly basis.
Pason Systems (PSYTF.PK), a business engaged in the design and
manufacture of proprietary instrumentation for the rental or sale
of drilling and service rigs. The company pays a dividend yielding
3.1% on a payout ratio of 37%. It has hiked its dividend at a rate
of 23% per year over the past five years.
In addition, investors seeking dividend income in Canada can
browse through a number of constituents of the S&P/TSX Canadian
Dividend Aristocrats index. These stocks are members of the S&P
Canada Broad Market Index "that have followed a managed-dividends
policy of consistently increasing dividends every year for at least
five years," according to Standards & Poors. There are 58
Canadian Dividend Aristocrats
, ranging from the high yielder Atlantic Power (AT), with a
dividend yield of 8.3%, to Canadian Utilities ([[CDUAF.PK]],
[[CDUTF.PK]]), Enbridge (ENB) and Transcontinental A ([[TCLAF.PK]],
Investors can invest in the overall S&P/TSX Canadian
Dividend Aristocrats Index by investing in iShares S&P/TSX
Canadian Dividend Aristocrats Index Fund, an ETF with a
distribution yield of 3.3% and an expense ratio of 0.67%. Please
note that Dividend Aristocrats as a group have a general tendency
to outperform the broader market (see the chart below).
(click to enlarge)
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours.
The 9 Best Dividends On August 31, 2012