Sneak preview: Top dividend stocks of 2016

We’re hard at work on this year’s Dividend All-Stars, which grades the largest 100 dividend stocks in Canada. As a preview, I thought you might be interested in a few highlights and some behind the scenes data to whet your appetite for the next issue of the magazine.

The Dividend All-Stars strategy has been running since 2007 under a variety of names. Last year it was called the Retirement 100, but the core approach to finding good dividend stocks hasn’t changed. That’s a good thing, because it has been quite profitable over the years.

Our A-graded stocks gained a total of 148%, on average, since we stared back in 2007 despite the market crash of 2008. While the market recovered from its lows, it climbed just 39% over the same period.

Last year was also a good one for the A-graded stocks, which gained 14% on average. By way of comparison, the market climbed 11% over the same time frame.

This year there are just under 300 dividend paying common stocks on the TSX. While we focus primarily on the 100 largest companies (those with market capitalization in excess of $2,850 million), the following statistics reflect the larger universe of dividend payers.

The average dividend yield of dividend payers on the TSX is 3.44% and the median yield is 2.92%.

The median, you’ll remember, is the point at which half the readings are higher and half are lower. I’ll generally stick to medians instead of averages because averages can be overly impacted by a few unusually large readings. For instance, the average yield of five stocks with yields of 2%, 3%, 4%, 5%, and 31% is equal to 9% while the median is 4%.

55% of the dividend payers boosted their dividends over the last five years while 18% reduced them. The median stock grew its dividend by 5.8% on average annually over the last five years. (Stocks that eliminated their dividends are not included in these figures.)

The median price-to-earnings ratio of dividend payers is currently a little high at 19.3. Even worse, that figure only includes companies with positive earnings, which accounted for 76% of the stocks. The other 24% lost money.

Overall the market of dividends stocks remains more expensive than I’d like. But it also seems likely that it will outperform the very low yield offered by federal government bonds over the long term. Mind you, a crash or two along the way could make it an usually rough ride.

Keep an eye out for the next issue of MoneySense magazine to find out all about this year’s team of Dividend All-Stars and come back to moneysense.ca to see the full ranking of 100 stocks.

Safer Canadian Dogs

Investors following the Dogs of the Dow strategy want to buy the 10 highest yielding stocks in the Dow Jones Industrial Average (DJIA), hold them for a year, and then move into the new list of top yielders.

The Dogs of the TSX works the same way but swaps the DJIA for the S&P/TSX 60, which contains 60 of the largest stocks in Canada.

My safer variant of the Dogs of the TSX tracks the 10 stocks in the index with the highest dividend yields provided they also pass a series of safety tests, such as having positive earnings. The idea is to weed out companies that might cut their dividends in the near term. Just be warned, it’s a task that’s easier said than done.

Here’s the updated Safer Dogs of the TSX, representing the top yielders as of October 5. The list is a good starting point for those who want to put some money to work this week. Just keep in mind, the idea is to hold the stocks for at least a year after purchase – barring some calamity.

Source: Bloomberg, October 5, 2016

Notes

Price: Closing price per share

P/B: Price to Book Value Ratio

P/E: Price to Earnings Ratio

Earnings Yield: Earnings divided by Price, expressed as a percentage

Dividend Yield: Expected-Annual-Dividend divided by Price, expressed as a percentage

As always, do your due diligence before buying any stock, including those featured here. Make sure its situation hasn’t changed in some important way, read the latest press releases and regulatory filings and take special care with stocks that trade infrequently. Remember, stocks can be risky. So, be careful out there. (Norm may own shares of some, or all, of the stocks mentioned here.)