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Retirement 100 (Fall 2017)

We're pleased to present you with the eleventh anniversary edition of the Dividend All-Stars. It serves up a new crop of the best blue-chip dividend stocks in Canada while harvesting a decade's worth of gains.

If you had purchased an equal dollar amount of each A-graded Dividend All-Star and rolled the proceeds into the new ones each year, you'd have gained a total of 178% since we started way back in 2007. Similarly, a portfolio of A-and-B stocks would have climbed 119%. By way of comparison, the S&P/TSX Composite Index ETF (XIC), which tracks the broad Canadian stock market, lagged with a return of 47% over the same period. The A-graded stocks beat the market index by an average of 6.6 percentage points annually since we started.

More recently, the A-graded stocks gained an average of 12% since last year's update. In an unusual, but by no means unique turn of affairs, the larger group of A-and-B-graded stocks fared better with gains of 16% on average. Both handily beat the S&P/TSX Composite ETF (XIC), which advanced 5% over the same period.

(The returns above assume dividend reinvestment when the list was updated each year. They do not include commissions, taxes, or similar frictions.)

We're happy with the results and they help to emphasize market research that has extolled the virtues of dividend stocks for a long time. For instance, Dartmouth professor Kenneth French studied stock picking strategies globally and his numbers demonstrate that dividend stocks have fared particularly well in Canada.

In one study Professor French sorted Canadian stocks by dividend yield at the end of December and put them into three portfolios. The first portfolio held the 30% of stocks with the highest yields and the second contained the 30% of stocks with the lowest yields. The final portfolio tracked stocks that didn't pay dividends. The portfolios were followed for a year and then the process was repeated.

The accompanying figure shows the growth of each portfolio along with that of the Canadian stock market. The high-yield stocks outperformed the market by an average of 4.1 percentage points a year from 1977 through to the end of 2016, which really adds up. The low-yield group underperformed by 0.7 of a percentage point annually over the same period.

We're struck by the horrible returns generated by the no-dividend group, which trailed the market by an average of 7.5 percentage points a year from 1977 through 2016. Sure, the group rocketed higher in the late 1970s when resource companies boomed, but it peaked in 1981 and then crashed. Shockingly, the portfolio of non-dividend payers has yet to eclipse its 1981 highs.

Aside from strong past performance, focusing on dividends can lead to behavioural benefits for investors. Problem is, bear markets cause a great deal of distress and they can prompt investors to sell rashly. But investors who pay attention to dividend yields will notice that yields rise when stock prices fall. The higher yields may encourage them to load up - or at least stay invested - during bear markets when prices are low. At least, that's the theory.

Harvesting Dividends

When picking dividend stocks we evaluate each candidate based on its yield, reliability, and value. You can read all about the process over here [link TK], but we boil everything down to an easy to use letter-grade that sums up a stock's investment potential.

Stocks with the best prospects are awarded As and solid candidates get Bs. We think both are worthy of your consideration. Middle of the road options get Cs while those in need of improvement get Ds or Fs.

A select group of 7 of stocks managed to earn As this year while 15 picked up solid Bs.

The All-Star Leaders

The following three banks got As last year and they did so again this year. The Bank of Montreal (BMO) offers a yield of 4.0% and trades at 1.5 times book value. CIBC (CM) provides a 5.0% yield and trades at only 10 times earnings. Last, but not least, TD Bank (TD) pays a 3.6% yield and sports the strongest momentum of the three with a one-year return of 17.5%.

All of the banks generate more income for investors via their dividend yields than they offer on their 'high interest' savings accounts. But dividend income isn't as safe as a savings account and there are storm clouds on the horizon. For instance, the move by the Bank of Canada to boost interest rates, along with a flagging real estate market, may weigh on the banks.

Insurance firms Great-West Life (GWO) and Sun Life Financial (SLF) also made it to the top of the class again with yields of 4.3% and 3.7% respectively. Sun Life sports the best performance over the last one- and five- years for the A-graded stocks with total returns of 19.2% and 146.5% respectively.

Financial conglomerate Power Corporation of Canada (POW) and its subsidiary Power Financial (PWF) round out the A-Team. They provide yields of 4.7% and 4.9% respectively. Both trade at low earnings and book value multiples. They also own stakes in Great-West Life and IGM Financial.

The B Team

Just a step behind, the B-list starts with the Bank of Nova Scotia (BNS) and National Bank (NA), which both happen to yield 4.1% and to trade at 12 times earnings.

They're joined by insurance firms Genworth MI Canada (MIC), Industrial Alliance Insurance (IAG), and Manulife Canada (MFC). Manulife is the largest of the bunch. It offers a yield of 3.4% and is the best one-year momentum candidate of the B-graded stocks with a total return of 39.2% over the last 12 months. Industrial Alliance Insurance pays a 2.7% yield and trades at only 10 times earnings. Genworth MI Canada is in the mortgage insurance business. As a result, it could be hard pressed should the real estate market collapse. But it offers a yield of 4.9% and trades at just 7 times earnings and 0.9 times book value.

E-L Financial (ELF) is an insurance-focused conglomerate that owns Empire Life. While the firm pays a relatively paltry yield of 0.6%, it trades at a sharp discount to its net asset value and at just 5 times earnings.

Asset manager CI Financial (CIX) pays a 5.2% yield, which is the highest of the All-Stars. But it is under pressure from a bevy of low-cost competitors.

The list continues with auto-parts firms Linamar (LNR) and Magna (MG), which offer relatively modest yields, strong dividend growth, and low price-to-earnings ratios of 8 and 9 respectively. Magna pays its dividend in U.S. dollars.

Electric utility Fortis (FTS) just made the grade. It pays a 3.5% yield but its stock is a little on the expensive side at 20 times earnings.

The large media company Thomson Reuters (TRI) pays a 3.0% yield and the payments are in U.S. dollars.

The B-team wraps up with four oil and gas firms, which is a little unusual. ARC Resources (ARX), Imperial Oil (IMO), Suncor Energy (SU), and Whitecap Resources (WCP) all got the nod. ARC offers the highest yield at 3.6%, followed by Suncor at 3.2%, and Whitecap at 3.1%. Imperial Oil pays the least at 1.7% but its shares trade at only 12 times earnings.

(In the interest of full disclosure, Norm owns many of the stocks mentioned above and in the accompanying tables.)

A Caveat

Use our grades as the starting point for your own research. Before buying any stock, make sure its situation hasn't changed in some important way and that it's right for your portfolio. Read the firm's latest press releases and regulatory filings. Scan newspaper stories to make sure you're up to speed on important developments and breaking news.

While we're pleased with our long-term track record, we can't guarantee that you'll make a fortune with every A- or B- graded stock. The market is just too unpredictable for that. Nonetheless, we do think they deserve your attention and further research.

Look beyond the grades and think about the unique or intangible features of each company. Such factors can be beneficial, like a recent technological development. But they can also be detrimental, like the sudden arrival of new competition. Similarly, we're in an aging bull market, which means that you should be prepared to take advantage of a market cool down, should one occur. Be careful out there.

Dividend All-Stars
A Grade Stocks
Bank of Montreal (BMO)
TD Bank (TD)
Great-West Life (GWO)
Sun Life Financial (SLF)
Power (POW)
Power Financial (PWF)
B Grade Stocks
National Bank (NA)
Bank of Nova Scotia (BNS)
Industrial Alliance Insurance (IAG)
E-L Financial (ELF)
Genworth MI Canada (MIC)
Manulife Financial (MFC)
CI Financial (CIX)
Linamar (LNR)
Magna International (MG)
Thomson Reuters (TRI)
Fortis (FTS)
ARC Resources (ARX)
Imperial Oil (IMO)
Suncor Energy (SU)
Whitecap Resources (WCP)
As of September 6, 2017

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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...