How we did it

For the Retirement 100 we grade Canada’s largest dividend stocks based on their ability to provide generous income to investors for a reasonable price. If you’ve ever read a report card, you’ll be able to understand our grades. The best firms score an A and good ones nab a B. Solid candidates slip through with a gentleman’s C while weaker prospects get by with a D or even an F. You can find the grades for all 100 stocks starting on the next page.

The grades themselves are based entirely on the numbers. We didn’t factor in any personal opinions about a firm. Instead, we scoured the Bloomberg database for detailed financial information starting with Canada’s largest dividend-paying stocks by market capitalization. We then trimmed the initial list to remove candidates that have been around for less than a year or lack the detailed financial data we need for numerical analysis. We then graded the remaining stocks using three primary criteria.

Yield: The more money a firm sends your way, the better. We gave top marks to stocks with high dividend yields. We also reward stocks that have a strong record of dividend growth, because firms that grow their dividends tend to be confident about their future prospects.

Reliability: While a good yield is great, we like it even more when we have some assurance that the dividends will continue to be paid. (Indeed, sometimes an extraordinarily high yield can be a warning sign, which is why we employ a bevy of additional tests.) As a result, we reward stocks that have earned more than they pay out in dividends because stocks that pay dividends that aren’t backed up by earnings will eventually be forced to cut them. We also give additional marks to firms with little debt because balance sheets stuffed to the brim with debt are risky. To measure each firm’s reliance on debt we compare its debt-to-equity ratio against other companies in the same industry.

Value: On the value front we want to be able to buy lots of assets for a low price. As a result, better grades went to companies with moderate-to-low price-to-book value (P/B) ratios. This number compares the market value of a company to how much cash you could raise by selling off the company’s assets (at their balance sheet prices) and paying off the firm’s debts. Low P/B ratios provide some assurance that you’re not paying much more for a stock than its parts are worth. We also prefer profitable stocks with lower price-to-earnings ratios.

Putting all of these factors together we arrived at the final grades for each of Canada’s largest 100 dividend stocks. In total, only six earned an A, but 18 managed a solid B this time around. We believe both A and B stocks are worth your consideration.

You should also keep in mind that the numbers only provide part of the story. Savvy investors look for businesses with unique or intangible features that might not be reflected in the hard numbers. It’s best to use our grades as the foundation for your own research and build from there. Like any screening strategy, the purpose of the Retirement 100 is to help you spot a few good ideas that you can then investigate in more detail.