There are a number of factors to consider when choosing an investment for your portfolio.  For active do-it-yourself investors it can take a lot of time to research and analyze stocks to determine the best fit for their portfolio.  Dividend growth investors are typically looking for a dividend growth stock to be value priced before buying.

But what does value priced mean?

Here are some criteria to consider for selecting a dividend growth stock, keeping in mind that any broad stock screening process is just a starting point and should be followed up with a more detailed analysis of the company before investing:

Low Price / Earnings Ratio

The price-to-earnings ratio is determined by dividing the stock’s current price by its earnings per share over the past 12 months.  A lower P/E ratio might be a sign that the company had a difficult time meeting earnings expectations from the previous year.  But if the company has an otherwise solid history of earnings and growth, a low P/E ratio can be a good indicator of value.

It’s important to note that P/E ratios vary from industry-to-industry so if you are using P/E ratio as part of your investment selection criteria you should make sure to compare companies in the same industry.  Utility stocks that are more mature and stable with lower growth potential will likely have a lower P/E ratio than stocks from the faster growing technology sector.

The top 10 stocks on the TSX60 with low P/E ratios are:

  1. Research in Motion (RIM)
  2. Inmet Mining (IMN)
  3. Magna (MG)
  4. Nexen (NXY)
  5. Canadian Tire (CTC.A)
  6. Sun Life (SLF)
  7. National Bank (NA)
  8. Bank of Montreal (BMO)
  9. Metro (MRU.A)
  10. CIBC (CM)

High Dividend Yield

Dividend yield is determined by dividing the annual dividend per share that the company pays by the price per share that the stock is trading at.  This screen is quite simple and looks for stocks with the highest dividend yield.

When identifying high dividend yield stocks it’s important to understand whether the dividend may be at risk.  A high dividend payout ratio, especially compared to the typical industry standard, could indicate that a dividend reduction is imminent.

The top 10 stocks on the TSX60 with the highest dividend yield are:

  1. Transalta (TA)
  2. BCE (BCE)
  3. Sun Life (SLF)
  4. Bank of Montreal (BMO)
  5. Shaw Communications (SJR.B)
  6. Husky Energy (HSE)
  7. Telus (T)
  8. CIBC (CM)
  9. Power Corp (POW)
  10. Rogers Communication (RCI.B)

Value Ratio Approach

The value ratio combines the previous two methods into a simple screening method.  This approach is based on selecting stocks that have a high dividend yield AND a high earnings yield, and is determined by dividing a stock’s P/E ratio by its dividend yield.

The top 10 stocks on the TSX60 with the best value ratio are:

  1. Sun Life (SLF)
  2. Bank of Montreal (BMO)
  3. BCE (BCE)
  4. CIBC (CM)
  5. Rogers Communication (RCI.B)
  6. National Bank (NA)
  7. Power Corp (POW)
  8. Husky Energy (HSE)
  9. Telus (T)
  10. Bank of Nova Scotia (BNS)

Now let’s use the 10 stocks we uncovered using the value ratio approach and put them under the dividend growth stock microscope.

5 Year Average Dividend Growth

A dividend aristocrat has typically increased their dividends for a number of consecutive years.  Some strict dividend growth stock investors use 25 years of consecutive dividend increases as their benchmark, and other go as low as 5 consecutive years.

Because of the recent global financial crisis many dividend aristocrats put their dividend increases on hold in order to strengthen their balance sheets.  Therefore, rather than looking at consecutive years of dividend increases, let’s see how our value stocks measure up when it comes to their 5 year average dividend growth rates:

  1. Rogers Communication (RCI.B) – 5 year average dividend growth rate = 155.33%
  2. Telus (T) – 5 year average dividend growth rate = 17.30%
  3. Power Corp (POW) – 5 year average dividend growth rate = 11.88%
  4. Husky Energy (HSE) – 5 year average dividend growth rate = 9.33%
  5. Bank of Montreal (BMO) – 5 year average dividend growth rate = 7.87%
  6. Bank of Nova Scotia (BNS) – 5 year average dividend growth rate = 7.47%
  7. Sun Life (SLF) – 5 year average dividend growth rate = 7.26%
  8. National Bank (NA) – 5 year average dividend growth rate = 7.04%
  9. CIBC (CM) – 5 year average dividend growth rate = 5.25%
  10. BCE (BCE) – 5 year average dividend growth rate = 0.00% (dividend halted in 2008)

5 Year Average Dividend Yield

The final criteria that I use for selecting a dividend growth stock is to look at the current dividend yield and compare it to the 5 year average dividend yield.  If the current yield is higher than the 5 year average, this can indicate that the stock is under-priced.

Here’s a look at our value stocks and if their current yield is above or below their 5 year average yield:

  1. Rogers Communication (RCI.B) – Current yield above 5 year average by 1.2%
  2. BCE (BCE) – Current yield above 5 year average by 0.9%
  3. Sun Life (SLF) – Current yield above 5 year average by 0.7%
  4. Husky Energy (HSE) – Current yield above 5 year average by 0.7%
  5. Power Corp (POW) – Current yield above 5 year average by 0.5%
  6. Telus (T) – Current yield below 5 year average by 0.2%
  7. CIBC (CM) – Current yield below 5 year average by 0.2%
  8. Bank of Montreal (BMO) – Current yield below 5 year average by 0.4%
  9. Bank of Nova Scotia (BNS) – Current yield below 5 year average by 0.4%
  10. National Bank (NA) – Current yield below 5 year average by 0.9%

Which Dividend Growth Stock Would You Choose?

A few weeks ago I wrote an article about the three dividend stocks on my watch list.  Two of those stocks made this list (SLF and BCE), while the other stock on my radar (Shoppers Drug Mart) failed to meet the high yield requirements to qualify.

If I had to choose a dividend growth stock based on this list, I might give Rogers the nod over BCE in the telecom sector, Sun Life the slight edge over Power Corp in the insurance sector, and Husky Energy looks like they stand alone in the energy sector.

Do you use similar methods to screen your stock selections for value?  Leave a comment and share your thoughts on how you identify a good buy.


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