In Search Of Canadian Dividends

by: Dale Roberts

While I am one who recognizes the value and common sense of indexing and diversification across many asset classes and sectors and regions, I am also a proponent of the dividend growth strategy. Dividend growth entails purchasing companies that have raised their dividend for many years and counting. Think of it as giving your portfolio a raise every year. Wal-Mart (NYSE:WMT) for example has raised its dividend for an average of 18% every year over a 10 year period. A better way to think of that is - Wal-Mart has given investors an 18% raise every year. Wal-Mart's current tag line (OK they call them slogans on TV sitcoms) is Save Money. Live Better. For Wal-Mart investors it might read something like More Money Every Year. Live Better.

The U.S. corporate landscape offers a non-stop all-you-can-eat buffet of massive companies and multinationals that have raised their dividends "forever." Of course, we can go to David Fish's wonderful site that lists all of the dividend payers by category. It's a complete (page after page) menu of companies that have continuously raised their dividends for 25 years or more, ten years or more or a measly 5 years or more. This is where dividend growth investors feast.

So naturally, I'm in the dividend game in the U.S. I currently use the Dow Jones 30 (NYSEARCA:DIA) to gain access to U.S. corporations and dividend growth. While DIA offers a yield not quite up the desired level for most dividend growth investors, many of the dividend aristocrats and champions are in the Dow 30. Certainly DIA has some challenges as a dividend growth proxy as I outlined in this article coincidentally entitled "The Dow Jones Industrial Average as Dividend Growth Proxy?"

In my search for U.S. dividends I also did some research on the most popular dividend growth ETF, Vanguard (NYSEARCA:VIG). I also did an exercise where I skimmed the top ten holdings of VIG and created the Scaredy Cat Vanguard Dividend Growth portfolio (SCVIG). You can find those articles here and here.

Now head north across the border in search of dividend aristocrats in Canada and it becomes a cold barren wasteland - matching the impression that many Americans hold of Canada. In fact, we couldn't put together a true diversified dividend aristocrat portfolio or ETF if we tried. And I tried.

Sure Canada has the most sound banking system on the planet. And our big banks take advantage of this oligopoly landscape to reap in the profits and return much of those profits to investors in the form of dividends. There have been many articles written on Seeking Alpha detailing the strength and benefits of holding Canadian banks. And a few wise dividend growth investors on SA such as Bob Johnson include Canadian banks as staples in their portfolios. Our banking system is dominated by the big five and they are The Royal Bank of Canada (NYSE:RY), Scotiabank (NYSE:BNS), Toronto-Dominion Bank (NYSE:TD), Canadian Imperial Bank of Commerce (NYSE:CM), BMO Financial Group (NYSE:BMO). They all have attractive yields of 3.5% plus and raise their dividends in the 10-15% range on an annualized basis. They are cash machines. Let's call them ADMs for automatic dividend machines.

And speaking of oligopolies, Canada's telco sector is dominated by three major players - Bell Canada (NYSE:BCE), Rogers (NYSE:RCI) and Telus (NYSE:TU). Again due to their large moat and pricing power they generate incredible cash flow and dividends. Investors should take note, oligopoly = GOOD. Not so good for Canadian consumers, but great for the companies and shareholders.

OK, so we have great banks and great telc's up here in the great white north. But a dividend growth investor cannot survive on a two-course meal. After these two sectors we're then mostly down to table scraps. Sure there are some great utilities such as TransCanada (NYSE:TRP) and Enbridge (NYSE:ENB). In fact those are two (of three) individual companies that I still hold outside of my ETFs. And they have treated me so well, I continue to hold a modest amount after trimming both positions after a double or more. Note, I also hold Tim Hortons (THI). Timmy's just increased its dividend by some 24% recently. Ka-Ching!

Back in my other life as an ad guy, I was a creative director on Tim Hortons for a couple of years. I know the very simple story. Canadians are addicted to the Tim Hortons coffee and the Tim Hortons' brand. Until Canadians go to counselling and stop this irrational obsession I will continue to be a shareholder. Tim's is also reasonably popular in the U.S. northeast. I purchased THI back in the day and did so with the strategy that I was reasonably confident that after filling in every single intersection in Canada - and occupying the four corners of said intersections - Tim's would have nothing to do with its money but return most of it to shareholders in the form of dividends. And I was crossing my fingers that the yield at that point would have grown to some 4-5%. That recent 23.8% dividend increase is heading in the right direction.

But of course, one cannot build a diversified dividend stream from three companies, so I went on the hunt for reliable and increasing dividends. The first thing I found out is that the Canadian dividend aristocrat indexes are based on 5 years of dividend growth. There are not enough true dividend aristocrats in Canada to build an index.

To select the best dividend index (or to find the best index to skim the top 15 or 20 companies) I investigated the individual companies from the most popular high yield dividend ETFs such as XEI and other dividend 'artistocrat' ETFs.

I then plotted the dividends and dividend growth rates (OTCPK:CAGR) and duration. From there I ran projections to estimate the total income each company would generate over a 15-year period with those dividends being reinvested at their current growth rate. I then ordered them by companies that would generate the highest yield over that 15 year period. Please note that there is no guarantee that a company can continue to pay, or maintain its dividend growth rate. Yields and growth rates have not been updated since I began this evaluation a few weeks ago. And I do invite your scrutiny with respect to these figures. Where it is listed na, the period may be interrupted by dividend decreases, be erratic or have stalled. Here's the first 35 by projected income generation.

Company Current Yield CAGR Period
Glentel 3.3% 45% 5 years
Computer Modelling 2.9% 40% 8 years
Killiam Properties 4.38% 44% 5 years
Genivar Inc. 7.4% 20% 7 years
Nordian Inc. 4.9% 25% na
Canada Bread 4.0% 27% 5 years
AGF 11.1% 14.2% 14 years
Constellation Software 4.5% 41% 5 years
Calian Technologies 6.0% 23% 5 years
Cogeco 2.74% 26% 7 years
Russell Metals 4.8% 19% 10 years
Husky Energy 4.1% 19.6 10 years
Rogers 3.5% 21% 7 years
Algonquin Power 4.25% 18% 1 year
HR Real Estate 5.6% 14.7% 3 years
Just Energy 12.6% 4.6% 8 years
Evertz Tech 3.4% 18% 6 years
Reitmans 6.45% 11% 17 years
Transcontinental 5.0% 13.4% 15 years
Canadian Energy Services 4.7% 13% 5 years
Laurention Bank 4.5% 13.4% 6 years
Telus 4.0% 14% 10 years
Black Diamond Group 3.6% 15% 5 years
IGM Financial 5.1% 11% 10 years
Power Financial 5.0% 11.1% 14 years
Sun Life 5.22% 10.5% 10 years
Royal Bank 3.95% 13.5% 15 years
Newalta 2.4% 18.9% 4 years
Calfrac Well Services 4.4% 11.8% na
Wajax 7.4% 5.7% na
Crescent Point 7.2% 5.8% 10 years
Bell Aliant 7.2% 5.7% 10 years
ScotiaBank 3.96% 12.5% 15 years
Atlantic Power 9.46% 1.58% 6 years
CIBC 4.6% 10% 10 years

The top of the list is certainly a head-scratcher. And there is some research to be done on those companies. And don't be fooled by the numbers. AGF looks interesting at first blush. But that is a mutual fund company with outflows that should make you squeamish. In fact, it is my mission every day to get Canadians out of said high-fee mutual funds. Their stock price has been more than cut in half over the last five years. And the PE is still near 40 according to TD Waterhouse. The payout ratio is listed as 370. Yikes.

I'll be back soon with the next 35 and a look at the Canadian ETFs that provide exposure to Canadian Dividends.

Disclosure: I am long DIA, ENB, TRP, THI, RY, CM, TD, BNS, BMO, BCE, TU, RCI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Dale Roberts aka cranky is a Streetwise Coach at ING Direct Canada (a subsidiary of Scotiabank). Streetwise Portfolios offer Canadians low-fee, turnkey, index-based portfolio options. Dale’s commentary does not constitute investment advice, the opinions and information should only be factored into an investor's overall opinion forming process.