Canadian Dividend Stock Selection Still Made Easy

The title still says it all.

Contrary to what some people might have you believe, I think starting your research into Canadian dividend paying stocks to buy and hold in your portfolio can be made easy.  If you know where to look…

Don’t believe me?

Here’s one place to consider:  own what the big mutual funds and ETFs own.

I wrote this post almost six years ago.  I believe it remains relevant today.  Let’s compare 2011 to now below. Let me know if you see any themes.

Fund #1 – BMO Dividend Fund

Then:

Canadian Stocks Made Easy

Now:

Canadian Stocks Made Easy

 Images courtesy of BMO’s site.

Fund #2 – CIBC Dividend Growth Fund

Then:

Canadian Stocks Made Easy

Now:

Canadian Stocks Made Easy

 Images courtesy of CIBC’s site.

Fund # 3 – RBC Canadian Dividend Fund

Then:

Canadian Stocks Made Easy

Now:

Canadian Stocks Made Easy

 Images courtesy of Royal Bank’s site.

Fund # 4 – Scotia Canadian Dividend Fund

Then:

Canadian Stocks Made Easy

Now:

Canadian Stocks Made Easy

Images courtesy of Scotiabank’s site.

Fund #5 – TD Dividend Growth Fund

Then:

Canadian Stocks Made Easy

Now:

Canadian Stocks Made Easy

 Images courtesy of TD Bank’s site.

Fund #6 – iShares S&P/TSX 60 Index ETF (XIU)

I recall iShares XIU was one of the world’s first ETFs. It holds the largest Canadian companies. My perspective is, if collectively the largest 60 companies in Canada aren’t making money year-over-year, nobody is.  This ETF has provided strong Canadian market returns over the last decade and remains a great choice for your indexed portfolio.  That said, the top holdings in this ETF rarely go out of style.

Canadian Stocks Made Easy

 Image courtesy of BlackRock’s site.

Have you noticed anything interesting about these top-10 holdings?  What do you make of starting your Canadian stock research through owning what the big funds own?

Mark Seed is the founder, editor and owner of My Own Advisor - one of Canada's leading personal finance and investing blogs. As my own financial advisor, I've grown our portfolio from $100,000 to well over $500,000. Our next big goal is to own a $1 million investment portfolio for an early retirement. Come follow my saving and investing journey by subscribing to my site.

20 Responses to "Canadian Dividend Stock Selection Still Made Easy"

  1. tWhat is the point of spending the time to create and manage your own dividend stock portfolio which in the end only mirrors any number of ETFs? The expenses of owning a dividend ETF are trivial and the time required for oversight is precisely zero.

    Reply
    1. Fair points Jerry. Here is why I don’t invest in dividend paying stocks predominantly:
      http://www.myownadvisor.ca/reader-question-why-dont-you-just-buy-dividend-etfs/

      I think this makes great sense for the U.S. market, own a U.S.-listed ETF or international ETF. I’m not yet convinced the Canadian market is that difficult to figure out – via owning your own stocks for 3-4% steady yield/income plus capital gains.

      The time to monitor my stocks might be an hour per year. Maybe.

      Reply
      1. Also, I am not convinced dividend ETFs provide the dividend growth you would get with individual stocks. I have sense that if I hold a dividend ETF with a 4% yield today, it will have the same yield 10 years from now and hence my yield on cost didn’t change. Hopefully I am wrong and maybe I am misunderstanding how the dividend ETF would work. Any insight on this Mark?

        Reply
        1. Ultimately it’s total return that matters (combo of dividends + capital gains). From what I can glean from (history) for many dividend ETFs, they fail to keep up with most total return indexed ETFs over time. However, the last 10-years or so have been good for dividend ETFs and dividend stocks in general.

          So, this is the trade off in my opinion:
          1. Do you own more income-oriented assets in your portfolio (i.e., dividend producing assets, get income, and give up a bit of total return), OR
          2. Do you own more total, broad-market assets in your portfolio (i.e., you’ll need to sell those assets to give you the income you need).

          I prefer a bit of both hence my strategy = own many dividend paying stocks and own U.S.-listed ETFs. Best of both worlds!

          Reply
      1. Say your dividend ETF, not that you would have it all in Canada anyhow, costs you 0.5% on average. That’s $5,000 per year on a $1 M portfolio. Small potatoes? Not really. Then have transaction costs to sell on top of that. VYM and HDV at this time, are the only U.S. dividend ETFs I will consider. Say $250,000 invested will cost only $200 per year. That’s decent money spent for diversification with your 3%+ yield.

        Reply
        1. So that’s $200 per year every year for as long as you hold those ETFs. After 20 years that’s $4,000, compared to owning 25 individual stocks which would cost $250….even after being held for 20 years. That’s an increase of 1600% in fees. As others have pointed out 25 stocks in Canada is diversification enough, if not you could buy 50 stocks and still pay less in fees.

          Selecting individual stocks isn’t rocket science. Just buy quality dividend paying stocks when they are undervalued. Stock is undervalued when it’s current dividend yield is greater than it’s (10 yr) average dividend yield.

          Reply
          1. Very true, but it’s pretty much impossible for the average investor to hold >100 stocks to be modestly diversified. Investors need to invest outside of Canada to reduce risk. This is where I personally find U.S. listed ETFs like VTI, VUN, VXC, VYM, HDV, etc. good for both income and capital gains – to be diversified from around the world. You pay a fee for it yes but it’s small when compared to other opportunity costs of underperforming the market or risking all your money in Canada.

            That said you know I’m a fan of Canadian dividend paying stocks; so I do own many of them for income and likely always will.

            Good to hear from you, hope all is well.

  2. “My perspective is, if collectively the largest 60 companies in Canada aren’t making money year-over-year, nobody is.”

    This is faulty thinking. To get a tight correlation between “the largest 60 companies” and the “nobody” companies, you would have to have a very long time frame (25+ years, two full business cycles, etc.), and compare only public companies. By the time the comparison is done, all you end up with is large/mature corporations, all of which — stab in the dark — might have profit margins within a similar range. But what of smaller and/or private enterprises which might have a profit margin 2-3x that of the largest companies?* Or the supra-enormous companies such as Amazon which literally make almost no profit yet have year-over-year stock gains that crush the largest 60?

    Indicies (and the reflective funds) are based on market cap, not “making money year-over-year”, e.g. Valeant, Enron, Worldcom, et al. Other funds, such as every pension fund, puts money into these largest cap companies — NOT the ETF/index fund — simply because they have too much money to funnel into smaller companies which might have more profitability and/or profit when the largest 60 are not. Those top picks are more for stability than anything.

    Don’t forget, the individual investor can do things which the large investor cannot (and vice versa) and largeness does not automatically beget largess.

    *(That said, I recently read that Canadian banks have the biggest profit margin, by a large margin, out of all the banks in the world. But don’t worry, you’re not being gouged. 😉 )

    Reply
    1. My context is…if the biggest companies in Canada are struggling to survive, the majority of other companies will as well. Big, multi-national companies make money. Plain and simple. They may not be overly productive in your context, and I would agree, but they are huge market cap companies largely because they make money and lots of it. Such picks are for the most part, stable, and as an index as stable as they can be since indexers are not immune to market calamity.

      Agreed and like everything in life there are pros and cons to everything re: “individual investor can do things which the large investor cannot (and vice versa) and largeness does not automatically beget largess.”

      Cheers.

      Reply
  3. It’s all the same Canadian Blue Chip stocks that come to the top. Canada is such a small potato in the big picture … There is probably 20 or so stocks that they will all buy and that’s all you need when it comes to the Canadian market.

    As another reader just pointed out, all the big pension plans have to put their money somewhere … and they can’t invest 10B in a company worth 500M so the money goes around within the same companies.

    There are really 2 dominant sectors in Canada: Financials & Energy. You need to go to the US for Healthcare and Technology.

    The sooner you realize how limited the options are in Canada, the sooner you can focus on the handful of companies that matters to build a long term portfolio. No need for indexes here …

    Reply
    1. Agreed – Canada has financials and an energy that always comprises >50% market weight and to a lesser extent, telcos, materials, industrials and utilities of <10% weighting each. You can own the top 4-5 stocks in each sector and then strongly diversify your assets in the U.S. and abroad after that. Nothing wrong with indexing in Canada but I’ve decided it’s not for me at this time.

      Reply
  4. “Stock is undervalued when it’s current dividend yield is greater than it’s (10 yr) average dividend yield.”
    As a newbe to investing, I have always wanted to know how to figure out how you know when a stock is “undervalued”, so after reading the above line from Kanwal, where do you go to get the info and can you show an example.
    Thank you.
    I know that this is probably basic info for most of your readers/ followers.
    I am trying to learn.
    TimV

    Reply
    1. I personally find “undervalued” very subjective Tim so I’m not an ideal candidate to tell what that means 🙂 That said, you can usually find “value” when a stock has the following criteria:

      1. Trading below historical P/E (Price/Earnings) ratio. I use Norm’s site for this data:
      http://www.stingyinvestor.com/SI/strategy.shtml

      2. I also look at higher yielding stocks, to a point, because that means their prices might be out of whack with their historical yields. Some examples of stocks I find are “decent” value now in Canada are CM and POW.

      Again, I look at many other metrics but the goal of my post was to give readers insight into how I think. Your mileage may vary. Thanks for being a fan.

      Reply
      1. Hi Mark,

        I actually don’t think “undervalue” is subjective. It’s very clear, on any given day a stock is either undervalued or overvalued. The stock’s current yield is either going to be greater or less than it’s average yield.

        Target (TGT) has an annual dividend of $2.40 and is trading at $54.64 today. Watch what happens to the dividend yield if the stock price starts to go down:

        $2.40 / $54.64 = 4.39%
        $2.40 / $40.00 = 6.00%
        $2.40 / $30.00 = 8.00%
        $2.40 / $20.00 = 12.00%

        If the stock prices continues to drop over time, the dividend yield will go up. On the other hand if the stock price continues to rise the dividend yield will decrease. All things considered equal it would be better to purchase the stock at $20 rather than say $100, the higher the dividend yield the better. Therefore as we’ve seen historically TGT’s average yield has been 2.65%, and today it is trading at 4.39% which means historically it’s stock price is low. This is a similar approach to looking at stocks trading below their historical P/E, but looking at historical dividend yield provides a more accurate measure since it takes into account the dividends.

        I could go into more detail, but that would result in a much longer reply. For anyone interested in learning more…..Geraldine Weiss does an excellent job of explaining this concept in detail with lot’s of examples in her book “Dividends Don’t Lie: Finding Value in Blue-Chip Stocks”.

        Again this isn’t the only metric to watch, see my previous reply where I list my 12 Rules, you’ll notice it also takes into consideration a low P/E value.

        In the last 18 years I have not purchased any stock when it’s current dividend yield was less than it’s average dividend yield, and this has served me well. Hopefully it will also help others in making wise investment decisions.

        Reply
        1. Well put.

          “If the stock prices continues to drop over time, the dividend yield will go up. On the other hand if the stock price continues to rise the dividend yield will decrease.”

          Yup.

          So…all things considered equal it would be better to purchase the stock at $20 rather than say $100, the higher the dividend yield the better but as you well know you need to be careful with high yields. High yields on Canadian bank stocks are a temporary concern. High yields on companies like CPG in the past are not good!

          Reply
    2. Hi Tim,

      As an example let’s use Target (NYSE: TGT) to determine if the stock is undervalued or overvalued today. I’ll use Yahoo Finance but other sites will work too:

      1. Go to Yahoo Finance (https://finance.yahoo.com/)
      2. At the top search for the ticker symbol: TGT
      3. Notice that the dividend yield today is 4.47%
      4. Click on the STATISTICS tab
      5. Scroll down to find “5 Year Average Dividend Yield”, and notice that it is 2.65%
      6. Now compare the two numbers:

      Current dividend yield = 4.47%
      Average dividend yield = 2.65%

      Since 4.47% > 2.65% the stock is undervalued today.

      I prefer to use the 10 year (or longer) average dividend yield, but I haven’t found a free online source that provides that 10yr value. If you are looking to quickly determine if a stock is undervalued the 5yr average yield will do. But if you want to get really technical, you could go to Morningstar.com and calculate the 10yr average yield yourself for each stock.

      Checking for undervalue is just one metric to verify before you make a buying decision. I personally use my 12 rules to determine if a stock is worth buying:

      1. Do you understand the product or service offered by the company?
      2. Will people still be using this product or service in 20 years?
      3. Does the company have a low-cost durable (lasting) competitive advantage?
      4. Is the company recession proof?
      5. Has the company had consistent earnings growth? Generally the EPS growth must be at least 8%
      6. Has the company had consistent dividend growth? Generally the dividend growth must be at least 8%
      7. Does the company have a low payout ratio? Payout ratio must be 75% or less.
      8. Does the company have low debt? Debt must be 70% or less.
      9. Does the company have a good credit rating? Company must have a minimum S&P Credit Rating of “BBB+”.
      10. Does the company actively buy back its shares? (optional)
      11. Is the stock undervalued?
      a. The P/E Ratio must be 25 or below.
      b. Is the current dividend yield higher than the average dividend yield?
      c. The P/B Ratio should be 3 or less.
      12. Keep emotion out of investing.
      A reminder to keep emotion out of the selection process. Discipline and patience are the keys to successful investing.

      Reply
  5. Thanks to both of you for your explanations / perspectives. I will have to hard copy this info and keep and read over and over.
    Again Thanks.

    Reply
    1. Welcome Tim. As you can appreciate, Kanwal has more rules than I do. Goes to show you even though we both like dividend paying stocks, everyone is different. Thanks for being a fan.

      Reply

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