10 Profitable Canadian Dividend Stocks

by: Plan B Economics

Many income investors are missing out on exposure to non-US dividend paying companies. There are many big foreign companies listed on the US exchanges, making it extremely easy for US investors to buy and sell their shares.

In my opinion, US-listed Canadian companies can be a great source for diversification for US investors. In a nutshell, here are a few key reasons to consider diversifying into Canadian companies:

  • The Canadian dollar is driven by different dynamics than the US dollar (such as the demand for resources) and may be a source of diversification for investors exposed to US dollars.
  • Many Canadian industries operate in oligopolies (e.g. banking), which may strengthen pricing power and profitability.
  • As a commodity exporter, the Canadian stock market is heavily influenced by energy and materials - while non-resource Canadian companies may not provide direct exposure to energy and materials, a broad based ETF may [e.g. iShares MSCI Canada Index Fund (NYSEARCA:EWC)].
  • Since Canada exports raw materials to developing nations, many view Canadian companies as an indirect, lower beta emerging markets play. The advantage of indirect EM exposure via Canada is that Canadian reporting standards are often more transparent. Also, the higher beta of direct EM exposure (relative to developed market indices) is off-set because Canadian manufacturing isn't solely dependent on EM demand (i.e. manufacturers also sell to other developed markets and the domestic Canadian market). For some, this is a benefit.
  • Canada's banking system has been credited as one of the strongest in the world. While some may debate this, for others it is a point of relative strength.

There are a number of Canadian companies that pay nice dividends, for those looking for a foreign source of cash flow. However, investors must be aware of the tax consequences of receiving foreign income.

To help investors with their Canadian yield search, below I have outlined 10 profitable Canadian companies with a market capitalization over $1b and dividend payout ratio under 70%, in order of dividend yield:

Ticker Company Dividend Yield Payout Ratio
(MIM) MI Developments Inc. 5.84% 63.42%
(CM) Canadian Imperial Bank of Commerce 4.74% 51.50%
(SJR) Shaw Communications, Inc. 4.72% 52.58%
(BMO) Bank of Montreal 4.70% 52.94%
(TU) TELUS Corporation 4.21% 58.65%
(RCI) Rogers Communications Inc. 3.98% 49.01%
(BNS) The Bank Of Nova Scotia 3.94% 44.37%
(RY) Royal Bank of Canada 3.92% 48.87%
(TD) The Toronto-Dominion Bank 3.43% 42.56%
(CVE) Cenovus Energy Inc. 2.59% 40.80%

Many investors buying Canadian stocks are naturally attracted to the Canadian banking sector. Canadian banks have a long 'tradition' of being value plays. The current data is no exception, with Canadian Imperial Bank of Commerce, Bank of Montreal and The Bank of Nova Scotia and The Toronto-Dominion Bank appearing as decent values in the table below:

Ticker P/E P/B P/Cash
MIM 27.2 1.79 28.69
CM 11.1 1.88 20.78
SJR 12.5 2.73 24.47
BMO 11.6 1.41 0.97
TU 15.6 2.51 411.79
RCI 14 5.9 n/a
BNS 12 1.89 16.5
RY 13.3 2.01 6.9
TD 13.5 1.73 26.67
CVE 17.5 2.75 52.11

Despite their reasonable valuations, Canadian banks don't appear to be value traps. As measured by ROE, operating margin and profit margin, the Canadian banks are quite profitable:

Ticker ROA ROE Operating Margin Profit Margin
MIM 3.74% 4.96% 29.75% 32.36%
CM 0.75% 21.44% 30.62% 23.60%
SJR 5.92% 22.16% 28.11% 15.06%
BMO 0.70% 13.84% 29.64% 23.29%
TU 6.14% 15.96% 18.93% 11.69%
RCI 8.83% 42.64% 21.96% 12.58%
BNS 0.91% 20.17% 38.71% 30.61%
RY 0.84% 18.37% 29.90% 23.79%
TD 0.81% 14.27% 31.60% 25.96%
CVE 7.03% 16.61% 14.06% 9.42%

One might wonder: how can the Canadian banks be so profitable with such low ROA? What investors must realize about the Canadian banks (and most banks, for that matter) is that they are highly profitable because they are highly leveraged at extremely low rates. Thus, a slim ROA can be overcome with a higher debt-to-equity ratio, as we will see below:

Ticker Total Debt/Equity
MIM 0.29
CM 4.41
SJR 1.49
BMO 4.94
TU 0.93
RCI 2.83
BNS 1.69
RY 1.54
TD 3.16
CVE 0.37

Dividend investors seeking foreign exposure might want to consider the stocks mentioned above - not just the Canadian banks. Regardless, before investing, investors must be sure to speak to a financial advisor to fully understand the implications of foreign income and currency exposure on their portfolios.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Data source: Finviz. This is not advice. While Plan B Economics makes every effort to provide high quality information, the information is not guaranteed to be accurate and should not be relied on. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing decisions.

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