Criteria For Selecting A Dividend Growth Stock

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.

Print Friendly, PDF & Email


  1. Andrew Hallam on May 16, 2011 at 5:47 am

    Hey Echo:

    You gave great advice on this post. Have you read Michael O’Higgins book, Beating the Dow With Bonds? I think you would absolutely love it. It didn’t get great reviews when it came out in 1999, but it is amazing, and I think it’s right up your alley. It’s a misleading title. The book has a great strategy of buying DOGS of the Dow (first popularized by O’Higgins in 1993) and buying bonds when stocks are expensive.

    Here’s the link:

    I have read more than 300 personal finance books. And this book is truly amazing. If it was reviewed today, it would be given five stars—because it was so wise and prophetic. Let me know if you order it. I’d love to discuss it with you.

    • Echo on May 16, 2011 at 10:41 am

      Hi Andrew, thanks for your comments. I have not read that book but I will check it out. Thanks for the recommendation!

  2. My Own Advisor on May 16, 2011 at 6:29 am

    Good post.

    For sure, I use a few of these methods and even more so, a combination of these when doing my detailed research on Canadian dividend-paying stocks.

    What you have written about is consistent with what I strongly believe: the best Canadian companies to own are typically big-caps, with significant cash-flows. These companies are (and have always been) the best to own because a) they have significant earnings to “give-back” so they can b) reward shareholders over time, with c) consistent dividend payments and in some cases d) predictable dividend increases.

    I love the fact I’m an owner of some of these businesses. I just wish I had more cash-flow myself to diversify more, and buy more 😉

    • Echo on May 16, 2011 at 10:48 am

      Thanks Mark, I know you do detailed research when selecting stocks. It’s good to see that there are still a few value stocks out there even after the market has risen so much in the last two years.

  3. The Investment Blogger on May 16, 2011 at 7:06 am

    Good starting points to look at. I would also add in debt-equity ratio, looking at levels of debt, as well as management’s strategy (doesn’t necessarily make it into the numbers) and use of debt in it. Reason being, if you are relying on the stock to continue with dividends, you want to make sure they can continue paying it. Heavy use of debt can indicate that they may one day not be able to absorb the debt if something goes wrong or earnings don’t hold up, which likely means a dividend cut or elimination or worse.

    For banks, the loan loss reserve is good area to look at as well. We saw this during the financial crisis where most investors totally ignored this area of the banks. That one area, was a big indicator of the winners & losers in the banking industry. We all remember Washington Mutual, Bear Stearns, Wachovia, etc were all dividend payers when they existed.

    You might find these two articles of interest for looking at bank loan loss reserves and the dividend:

    For all businesses, the payout ratio is another important indicator as well.

    Great post topic!

    • Echo on May 16, 2011 at 10:50 am

      @The Investment Blogger
      Thanks for stopping by and sharing your thoughts. Debt-equity ratio is definitely another factor to consider. I want those dividends to keep flowing (and growing) for the long term.

  4. The Passive Income Earner on May 16, 2011 at 12:12 pm

    Nice post.

    I also look at the payout ratio as mentioned. It needs to be sustainable. The screening you describe is a really good way to highlight stocks worthy of further scrutiny.

    I also tend to track the trading range in case there is an entry point with all the fundamental criteria met.

    • Echo on May 16, 2011 at 8:44 pm

      Good point about tracking the trading range. My only problem with that approach is that you may miss out on the opportunity if the stock doesn’t take a dip. The screens above are trying to identify value, and maybe waiting for a $1 or $2 dip is just being too picky? I’ve caught myself doing this before and missing out completely on a good buy.

  5. Doable Finance on May 16, 2011 at 1:35 pm

    When I invest, I take a top-down approach. I look at the industry first, do research on it and then see who is doing what and how as individual stocks.

    • Echo on May 16, 2011 at 8:45 pm

      @Doable Finance
      What industry is on your radar now? I like the approach, and right now it looks like Insurance is a good one to target.

  6. My University Money on May 16, 2011 at 5:46 pm

    Great article on dividend investing. I agree with the debt-equity ratio. I would also take a peak at their dividend growth over a slightly longer time period to ascertain how the company handled their dividend in past bear and bull markets. Finally, I always like to check out the management of the company I am investing in no matter what sort of strategy I am pursuing. If the company has recently changed management, or have shown a lot of turnover this may not bode well for the overall growth of the company.

    I have a hard time justifying not buying Husky right now. The only problem is that it seems to recommended everywhere you look. As a personal general rule, if all the experts are recommending something I try to stay away 😉

    • Echo on May 16, 2011 at 8:49 pm

      @My University Money
      If a company has a really long history of increasing dividends (like Fortis for example), I definitely give them more weight.

      Good point about looking at the management too, sometimes it’s tough to identify “good management”, but other times you can clearly see signs to stay away.

      As for Husky, I don’t think it’s being talked up that much. The hype is all on gold, silver, and other commodities right now.

    • The Investment Blogger on May 16, 2011 at 9:50 pm

      When you valuate the business, is its trading at a discount to its market price? If it is, and the other numbers meet your criteria, do you really care if others like it or not (i.e. others recommending it or not)?

      • My University Money on May 16, 2011 at 11:06 pm

        I don’t place too much weight on what the experts say, I just know that on average when ‘experts’ start pumping something up, it almost inevitable means that the investment has peaked and you will buy at the ‘high.’ So the contrarian in me just kicks up when I see Husky being recommended. But I agree, it seems pretty foolproof for any sort of investment portfolio.

  7. Travis@TradeTechSports on May 18, 2011 at 9:36 pm

    I agree with Investment blogger. I like to look at cash flow and debt as well. If a company has no cash coming in or has to pay down a lot of debt, how will they keep up the dividend?

    • Echo on May 18, 2011 at 10:46 pm

      I think that by using the value ratio approach you can weed out the companies with poor earnings whose dividend may be at risk.

      For example, Transalta had the highest yield but did not make the “value” list. Their dividend payout ratio is also very high, which is definitely a red-flag.

  8. Vijay on August 27, 2011 at 6:41 pm

    Where do you get the 5 Year Average Dividend Yield number from?

  9. Vijay on August 27, 2011 at 6:46 pm

    Also where do you get the 5 Year Average Dividend Growth number from?


Leave a Comment

Join More Than 10,000 Subscribers!

Sign up now and get our free e-Book- Financial Management by the Decade - plus new financial tips and money stories delivered to your inbox every week.