The Canadian economy has shown exceptional resilience during the Great Recession and continues to charge ahead of the U.S. and other developed economies. However, due to their high exposures to volatile materials and energy sectors, the nation's leading equity indices have underperformed their U.S. peers by a large margin. Still, investors in the pursuit of a meaningful yield can find plenty of investment opportunities in Canadian dividend stocks.
The Canadian market as a whole has produced lackluster returns over the past year. S&P/TSX Composite and TSX/S&P 60 indices lost above 3% over that period, compared to a gain of slightly more than 20% for the S&P 500 and S&P 100 indices. Dividend stocks have fared pretty well on both sides of the border. Despite the recent rebound in bond yields, the U.S. Treasury and Canadian government 10-year bond yields remain below 2%, which makes high-yield dividend stocks with strong fundamentals especially attractive investment vehicles for income investors.
In search of sustainable dividends at reasonably high yields, investors should focus on those companies that pay dividend yields higher than those on comparable assets and that exhibit stability and sustainability of earnings and dividend growth over time. Manageable debt levels, payout ratios below ominous rates and reasonable valuations are also important variables. Below is an overview of prospective income plays for investors in pursuit of attractive yields in Canadian dividend stocks.
First, investors can choose from a number of Canadian banks, most of which have rock-solid balance sheets and rank among the safest financial institutions in the world. Five largest Canadian banks - referred to as the big five - are all members of the S&P/TSX 60, an index that encompasses about 73% of Canada's equity market by capitalization. The five largest Canadian banks all pay dividend yields that are almost double that of the Canadian government 10-Year bond.
Especially attractive as income investments are the Royal Bank of Canada (RY), Bank of Montreal (BMO) and Bank of Nova Scotia (BNS). The Royal Bank of Canada pays a dividend yield of 4.2% on a payout ratio of 53%. Its forward valuation is below the stock's historical metrics. Bank of Montreal pays a dividend yield of 4.8% on a payout ratio of 50%. Based on a forward P/Es, it is trading at a discount to its peer group and historical ratios. The Bank of Nova Scotia pays a dividend yielding 3.9% on a payout ratio of 49%. Over the past five years, these three banks have grown their dividends at average annual rates of 5.2%, 1.3%, and 5.0%, respectively.
Another small-cap financial stock that has seen strong growth is that of Laurentian Bank of Canada. The bank boasts a dividend yield of 4.0%, five-year dividend growth of 9.0%, and a payout ratio of 54%. It trades at a forward valuation on par with its peer group and its own historical averages. The bank reported strong loan growth (over 9% year-over-year) in its latest quarter and "excellent" credit quality.
Investors who are wary of the prolonged surge in Canadian housing prices and mounting consumer debt and who thus prefer to avoid Canadian financial stocks, can consider investing in the gold sector. The sector offers value, given the extended slump in prices over the past year or so. It now looks poised for growth as gold prices are likely to stage a rebound in the near future. For instance, Barrick Gold (ABX) is a good income and value play. It pays a dividend yield of 2.3% on a low payout ratio of 20%. Its dividend increased at an average rate of 17% per year over the past year. The stock is attractive based on valuation, as its trailing and forward P/Es are well below those of competitors and the company's own historical metrics. An even more attractive dividend growth play may be IAMGOLD (IAG). This debt free company pays a dividend yielding 2.2% on a payout ratio of 24%. The stock has boosted its dividend 30% per year over the past five years. If it continues to hike its dividend at similar rates in the future, it will double its payout within three years.
Aside from the dividend plays in these two sectors, there are plenty of quality high-yield dividends in the Canadian stock market. One example is Power Corporation of Canada (PWCDF.PK), an international management and holding company with operations in financial, communications, and other service industries. It pays a dividend yield of 4.4% on a payout ratio of 30%. Its dividend grew at a rate of nearly 7% per year over the past five year years. The company's valuation is attractive as its P/E is trading at a discount to the ratios of the company's rivals and its own historical averages.
Other examples of high-yield dividend stocks include:
Calian Technologies (CLNFF.PK), a business and technology services company in the satellite communications, defense/security, and high-end telecommunications sectors. The stock pays a dividend yield of 5.4% on a payout ratio of 61%. The stock has seen robust dividend growth averaging 20.3% per year over the past five years. Its P/E is below that of the industry but above the company's own historical metrics.
Killam Properties (KMPPF.PK), a real-estate company engaged in the ownership, development, and management of multi-family properties and manufactured home communities in Canada. It pays a dividend yield of 4.4% on a payout ratio of 47%. The company has been boosting its dividend at an average rate of 20% per year over the past five years. It is one of the companies that pay dividends on a monthly basis.
Pason Systems (PSYTF.PK), a business engaged in the design and manufacture of proprietary instrumentation for the rental or sale of drilling and service rigs. The company pays a dividend yielding 3.1% on a payout ratio of 37%. It has hiked its dividend at a rate of 23% per year over the past five years.
In addition, investors seeking dividend income in Canada can browse through a number of constituents of the S&P/TSX Canadian Dividend Aristocrats index. These stocks are members of the S&P Canada Broad Market Index "that have followed a managed-dividends policy of consistently increasing dividends every year for at least five years," according to Standards & Poors. There are 58 Canadian Dividend Aristocrats, ranging from the high yielder Atlantic Power (AT), with a dividend yield of 8.3%, to Canadian Utilities (CDUAF.PK, CDUTF.PK), Enbridge (ENB) and Transcontinental A (TCLAF.PK, TCLCF.PK).
Investors can invest in the overall S&P/TSX Canadian Dividend Aristocrats Index by investing in iShares S&P/TSX Canadian Dividend Aristocrats Index Fund, an ETF with a distribution yield of 3.3% and an expense ratio of 0.67%. Please note that Dividend Aristocrats as a group have a general tendency to outperform the broader market (see the chart below).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.