Income 100: Summer 2008
Do you dream of relaxing on a sunny beach, drink in hand, while your investment portfolio throws off piles of cash? That's the life of an income investor. To help you get to that beach as quickly as possible, we have once again ranked the biggest trusts and stocks in Canada based on their ability to put steady streams of cash into your wallet.
Before we reveal the top picks in our fourth annual Income 100, let's begin by checking out how our Income 100 from last year performed. As you will recall, we examined 50 trusts and 50 stocks. We assigned them letter grades ranging from A, for absolutely excellent, all the way down to D, for dreadful.
Out of the 50 trusts we examined, only 18 garnered an A or a B on our grading system. We're pleased to say that these top-graded trusts gained an average of 13.2% over the last year, including distributions. The double-digit return from these trusts extends our record of success. Since we started grading trusts in 2005, our top-graded trusts have gained a total of 64.0%. (That's assuming you bought the top trusts each year and rolled your portfolio into the new picks in the following year.)
We measure the performance of our rating system by comparing our top picks against the Barclays Advantaged S&P/TSX Income Trust Index Fund, which reflects a wide swath of the income trust market. This year the index fund gained 9.1%, so our selections added 4.1 percentage points of value. Since we started ranking trusts in 2005 the Barclay's fund has gained 31.6%. Our top trusts have more than doubled the index's performance over that period.
We wish we could say that last year's top picks among dividend-paying stocks produced as much profit for investors. The problem was that many of the biggest dividend-paying stocks in Canada also happen to be financial service firms - think banks and insurance companies. As you may have noticed, the sub-prime mortgage problems south of the border walloped global credit markets and most financial service firms. The iShares Canadian Dividend exchange-traded fund (TSX:XDV), which tracks 30 of the largest dividend stocks in Canada, lost 7% last year. The good news is that our top income stocks - those rated either A or B - outperformed the index by 3.1 percentage points. The bad news is that despite beating the index, our stock picks still lost 3.9%.
Despite that setback, we're pleased with our results for the third annual Income 100. With both trusts and stocks, we managed to add value to what an index fund would have produced. In fact, we have now beaten our benchmarks each and every year we've produced our listing. But we want to stress that the market can be a fickle thing. We expect to lose money some years and lag behind our benchmarks from time to time.
How do we arrive at our grades? We base them on yield, reliability, and value. We give the best marks to firms that trade at reasonable prices while providing healthy and stable yields. (We invite you to learn more about the many factors that go into our grades by reading last year's Income 100 article.)
Despite the high-powered math that lies behind our rankings, our results can be understood by anyone who's gone to grade school. Trusts and stocks that are top cash generators earn an A. Good ones pick up a B. Solid but unspectacular candidates slip through with a C. Less attractive firms go home with a D or even an F.
We're not saying that each and every A-rated firm will generate enough cash to retire on. A few may disappoint. But our A-rated picks deserve your attention because they appear to possess the necessary factors for success. On the other hand, we recommend caution when considering bottom-of-the-class situations.
Our grades are based purely on the numbers. We don't factor in our personal opinions about a sector or a firm. Instead, we delve into the Bloomberg database for detailed financial information on each trust or stock. For the Income 100 we restrict our ratings to Canada's 100 largest income generating trusts and 100 largest stocks by market capitalization. If a company doesn't pay a dividend, or a trust doesn't pay a distribution, we kick it out of our analysis and pick the next biggest firm. We remove companies or trusts that have been around for less than a year and we also shun any candidates that lack the robust financial data we need for our detailed analysis.
After a great deal of number crunching, we arrive at the final grades for each of our 100 trusts and 100 stocks. This year, only a few candidates earned an A, but more managed a solid B. We think both the A and B groups are well worth your consideration.
Keep in mind that numbers can never tell the entire story. Smart investors are always on the lookout for businesses with unique or intangible features that might not be reflected in the hard numbers.
BCE is a good example. The venerable telecom company earned an A on this year's ranking, but it's in an unusual position. A consortium led by the Ontario Teachers' Pension Plan is looking to take the company private at $42.75 per share. The takeover is supposed to be completed by the end of the second quarter. Problem is, the market has strong doubts that the deal will be finalized. If the transaction goes through, shareholders will pick up a handy profit from current prices. If it fails, BCE will likely fall significantly. Our grading methodology can't take such situations into account. That's why you should always look beyond the numbers for other factors that can affect an investment.
The best way to use our grades is as a starting point for your own research. Before buying any A or B stock, make sure that a firm's situation hasn't changed in an important way. Read press releases, regulatory filings, and recent news stories to get up to speed on the latest developments. Like any screening strategy, the purpose of the Income 100 is to help you find a few good ideas that you can then investigate in more detail.
Download the table of the top 100 Stocks (a .xls file)
Download the table of the top 100 Trusts (a .xls file)
From the Summer 2008 issue
|Disclaimers: Consult with a qualified investment adviser before trading. Past performance is a poor indicator of future performance. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, financial advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. More...|