The current state of dividend stocks

SKIP AHEAD Safer Canadian Dogs

The new Dividend All-Stars have just been released. You can read all about this year’s crop of top stocks over here. But, before you go, stick around to find out about where the Canadian dividend stock market stands and how it has changed since last year.

First some good news. The average Canadian dividend stock climbed by 7.9% (including reinvested dividends) over the 12 months ending September 6, 2017. The median return was a touch lower at 7.1%.

(I’m going to highlight medians instead of averages from here on because they are less influenced by the extremes. You’ll remember that the median is the middle point of the group. So, the median return is the point at which half the returns are higher and half are lower.)

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Despite the solid returns, the median price-to-earnings ratio (P/E) for Canadian dividend payers didn’t change much, which implies that earnings grew at a similar rate. The median P/E ratio for dividend stocks was 19.6 this year while it came in at 19.3 last year (based on data from September 1, 2016).

Last year only 76% of dividend payers were profitable whereas this year 87% of them were in the black. That’s good news for dividend stocks and it reflects stronger economic conditions.

The median price-to-book-value ratio for Canadian dividend payers was little changed. It climbed from 1.73 last year to 1.79 this time around. Median price-to-cash-flow ratios bumped up from 10.1 to 10.3.

Dividend yields shrank a tiny bit with the median falling from 2.92% last year to 2.90% this time around. It’s a tiny difference that could easily vanish in a single trading day.

Unfortunately, dividend growth was a little sluggish. The median trailing 5-year average dividend growth rate fell from 5.8% last year to 4.6% this time around. While roughly 160 firms sported dividend growth both this year and last, the slow down suggests that firms are a little less optimistic about their future prospects this year.

Overall, the Canadian dividend stock market hasn’t changed much since last year based on these valuation measures.

But we are deep into a long bull market and it behooves investors to remind themselves that bear markets have a nasty habit of pouncing from time to time. I’m not saying that a bear market is right around the corner. Reality is, stocks might climb, sink, or stay the same over the next year. I simply don’t know.

However, if your portfolio is stock heavy, it might be a good time to do some rebalancing. Risk reduction is particularly important for those who would be unwilling (or unable) to hold on through another big downturn. Be careful out there.

The 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 June 8. 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.

Safer dogs of the TSX

Source: Bloomberg as of September 21, 2017

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.)

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