Dividend All-Stars 2020: How we chose the winners

Overview Top 100 Dividend Stocks Past Performance Methodology

Grades

Investors naturally salivate when they stumble across a stock sporting a sky-high yield. As tempting as those yields can be, though, it’s imperative to resist this reflexive response. While yields are relevant, other factors, like the reliability of the payout and the value of the company, are arguably just as—if not more—important to consider.

To produce the Dividend All-Stars, we grade the largest, most liquid Canadian dividend stocks. To earn top marks, each company must demonstrate its ability to provide a steady flow of income to investors, at a reasonable price. It can be a lot of data to digest, but we’ve condensed everything down into a letter-grade system that helps you size up a stock’s investment potential.

Naturally, A-grade stocks represent our top picks, but Bs are also solid stocks worthy of your consideration. Average dividend payers earn a C on our list, while companies that need improvement earn Ds or, in some cases, Fs if they have a weak outlook. 

It’s important to remember that this is a purely quantitative analysis; the ranking isn’t influenced by the character of the company or if it has an award-winning management team. 

The report is based on data from Bloomberg and Morningstar. This year we limited the list to members of the S&P/TSX Composite to ensure we’re zeroing in on the biggest, most liquid dividend-paying companies in Canada. This is a slight departure from the methodology used in previous iterations of this ranking. We also removed companies that lack the information we need to complete our report. Finally, we break the grade down into three parts: Yield, Stability and Value. 

While the underlying philosophy of the Dividend All-Stars is the same as always, we have made a few additional tweaks to our methodology for 2020. Here’s the complete breakdown:

Yield

We give top marks for companies with attractive yields and have a history of growing their dividends over the past five years. By taking this two-pronged approach, we ensure we’re identifying companies that reward investors and have the financial strength to grow their payouts over time. This accounts for 40% of the overall score. 

Stability

It’s important to remember that the dividend yield is simply the annual payout divided by the current share price. A sudden drop in a company’s share price will automatically increase its yield, which is why a sky-high yield should be viewed with some trepidation. 

We also want to focus our search on companies that we feel confident will be able to sustain their dividends. To do this, we want companies that earn more than they pay out, since that means they should be able to continue their dividend even if the company has a minor setback. Similarly, we want profitable companies that are growing their earnings and are not weighed down by debt relative to their peers. 

As mentioned earlier, stability is just as important as yield, so this, too, accounts for 40% of our final grade. 

Value

The final 20% of our grade goes to value. Being paid to wait is a great philosophy, but if you pay too much for your dividend stock, you may end up waiting a lot longer than you’d like to reap that payback. To winnow down our list, we rewarded companies that have a low price-to-book ratio. This ratio compares how much cash a company could theoretically raise if it were to sell off all of its assets and paid off its debts. The lower the P/B, the better. Likewise, by factoring in the price-to-earnings ratio, we want to identify profitable stocks we can snap up at a reasonable price.

We combine all of these factors to arrive at the largest 100 Dividend All-Stars in Canada.