As you probably know already, each year I select 20 US and 10 Canadian dividend stocks that will outperform the dividend index (and hopefully the overall stock market). I started this tradition back in 2012 and so far, I’m almost always right. This means that almost all my portfolios have beaten their benchmark year after year.
Some folks may think I’m doing this to show off, but that’s not the purpose. I carefully choose these companies based on my 7 dividend investing rules. The purpose of this book is mostly to demonstrate that you can create a very strong list of stocks if you use the right metrics to start with. Here’s a recap of the first four metrics I use.
#1 Never Pick High Dividend Yield
I already wrote a complete case against high dividend yield. The point of this article is that when you pick a high yield dividend stock, you sacrifice future growth in the name of higher income today. Since I invest for the long term, I don’t like to sacrifice the future in the name of money in my pocket today. This is why I have discarded all stocks paying over 5% yield and I’m very careful with stocks paying between 4% and 5%. Exceptionally I will take a look at a higher yielding stock if there is a very good reason such as the stock price dropping irrationally thereby boosting the yield to a high level.
#2 Focus on Dividend Growth
The dividend growth over the past 3 and 5 years are very important metrics for me. I like when both metrics are about the same growth rate as it gives me a better idea of where the company is going. A big boost in dividend payments over one year could drastically influence numbers over a 3 or 5 year period. This is why I take a careful look at each year during this period. I would rather pick a company that is growing its dividend by 6% each year than one that is going on a crazy trend of 18% for a year or two and then stops growing.
#3 Make Sure the Company Dividend Is Sustainable Forever
I know, the F word is almost impossible to guarantee in finance since “forever” usually means 3 months on Wall Street. However, if you cross reference the dividend payment with the payout ratio, you can see something very interesting; how the payout ratio reacts when the dividend increases. You can always play with earnings over a short period of time, but you can’t do this forever over several years. A 5 year graph is usually enough to determine if the company is increasing its payment only to please investors or if it can really afford it.
#4 What’s the Business Model?
Metrics will only tell you a part of the company story, but the real deal is found in the company’s business model.
Does the company have a strong competitive advantage?
Do you even understand how the business works?
And most importantly; do they operate the business successfully?
I’ve seen too many companies promoting how good they are without showing strong revenue and earnings growth throughout the year. I don’t really need to know if you are good or not if you can’t close sales, right? I don’t like thinking about the “potential” and would rather invest in something that makes money now.
November Results – Beating the US market, Short on Canada
Now that the year is almost over, I can reveal my picks for 2015. Overall, it was a hectic year for many companies as several sectors were severly hit. However, my US picks were strong enough to provide an added value of 2.63% (including dividend) from our benchmark, the VIG:
| TICKER | YTD | YIELD |
|---|---|---|
| Added Value | 1.79% | 0.84% |
| AAPL | 9.73% | 1.78% |
| BAX | -6.12% | 1.21% |
| BLK | -0.54% | 2.50% |
| CAT | -20.50% | 4.29% |
| CBRL | -3.51% | 3.27% |
| DIS | 22.40% | 1.13% |
| GRMN | -29.80% | 5.39% |
| GPC | -14.60% | 2.76% |
| HAS | 40.23% | 2.33% |
| HP | -13.20% | 4.74% |
| IDA | -1.30% | 3.09% |
| JNJ | -3.13% | 2.98% |
| LAZ | -5.06% | 3.09% |
| MHLD | 21.89% | 3.70% |
| MSFT | 16.84% | 2.70% |
| PEP | 5.23% | 2.84% |
| QCOM | -29.30% | 3.67% |
| UPS | -6.42% | 2.80% |
| VZ | -2.78% | 5.01% |
| WEC | -5.61% | 3.71% |
| Average | -1.28% | 3.15% |
| VIG | -3.07% | 2.31% |
I have two techno stocks that brought the portfolio down with Garmin (GRMN) and Qualcom (QCOM). On the other hand, fun & family are coming in on top of list with Walt Disney (DIS) and Hasbro (HAS) being among the best performing stocks in 2015.
Among companies that took a hit but I think should deserve a place in your portfolio, I’d say that Caterpillar (CAT) and Helmerich & Payne (HP) are among my favorite to bounce back in the future. Caterpillar has a strong economic moat and this is not at its first economic slowdown. CAT benefits from the widest dealership network across the world and makes world class equipment. The company is able to generate scaling economies compared to its competitors. Finally, Caterpillar is currently hurt by the mining and resource industry but benefits from the US construction coming back. The company is a real money making machine and its dividend will continue to increase in the upcoming years. If you are looking to add a solid dividend grower to your core portfolio, this is the right time to do so.
The second interesting company is Helmerich & Payne (HP). This is the largest well driller in the United States. The company is hurt by the drop in oil prices over the past 2 years. Business has become more difficult, but the company benefits from higher margins than its peers since they operate the most advanced rigs. The company is a dividend aristocrat and shows strong cash flow ability to keep increasing its dividend over time. The drilling sector is highly fragmented in the US and we expect smaller competitors to disappear to the benefit of HP and other bigger players.
Now, the Canadian picks…
| TICKER | YTD | YIELD |
|---|---|---|
| Added Value | -4.50% | 1.18% |
| AFN | -44.40% | 7.96% |
| BDI | -38.90% | 7.89% |
| CUF.UN | -16.30% | 9.94% |
| D.UN | -18.10% | 11.21% |
| EMA | 10.69% | 4.40% |
| FTT | -17.30% | 3.50% |
| GS | -18.70% | 3.85% |
| IFC | 7.26% | 2.38% |
| NA | -10.20% | 4.77% |
| T | -0.01% | 4.30% |
| Average | -14.60% | 6.02% |
| XDV | -10.10% | 4.84% |
I’m lagging my benchmark by 3.32% including dividend mainly because I’ve selected sectors which didn’t do any better in 2015. I expected resources to burst, but they busted! AG Growth International (AFN.TO), Black Diamond (BDI.TO) and Finning International (FTT.TO) suffered greatly from this situation. Black Diamond even announced a dividend cut on November 6th… I’m selling it in my own personal portfolio (that’s another post for next week!).
It’s hard to find great dividend stock which performed well when even the benchmark is showing a double digit loss. However, Intact Financial (IFC.TO) and Emera (EMA.TO) did very well and will continue to pursue this trend in 2016.
Among this list, my two favorite companies are Emera and Gluskin & Sheff (GS.TO). Emera benefits from several acquisitions in the USA with a stronger dollar and better economic environment. Its new project (the maritime link) will be completed according to budget and will be another great source of cash flow.
As for Gluskin & Scheff, the special dividend on top of the current dividend yield makes this company a very interesting play. The company shows a total dividend yield of roughly 6% but show also growth potential. The company evolves in wealth management, one of the most profitable sectors in the financial industry. A down market in Canada is the perfect time to pick up some more.
I’m currently working on my 4th edition of the Best dividend growth stock to hold for next year. If you have suggestions or comments regarding the previous book, let me know!
Please note that the book will delivered for free to all Dividend Stocks Rock members and will be sold on Amazon and by PDF.
Cheers,
Mike
