Seeking stocks that offer strong dividends and downside protection

The Globe and Mail, Number Cruncher

By Peter Ashton

September 14, 2017

In The Globe And Mail, Peter Ashton uses Strategy Builder to search for Canadian stocks demonstrating reasonable valuations in terms of price-to-earnings and price-to-book ratios, along with strong and stable dividend yields.

What are we looking for?

Canadian dividend stocks poised to weather a market downturn.

Canadian and U.S. markets have seen a turbulent summer with alternating periods of strong price appreciation followed by steep sell offs owing to trade concerns or dire warnings of an imminent market collapse. No one knows when the next bear market will be, but with the current bull market now 114 months old, no one would be surprised by a 10-per-cent to 20-per-cent pullback in equity markets. One strategy to protect against such a decline while remaining invested is to buy value stocks offering strong dividends. A high dividend yield makes it more tolerable to wait for stock markets to recover. In addition, a true bear market would be accompanied by falling interest rates, which would make dividend stocks more attractive.

The screen

We will be using Trading Central Strategy Builder to search for Canadian stocks demonstrating reasonable valuations in terms of price-to-earnings and price-to-book ratios, along with strong and stable dividend yields.
We will start by screening for Canadian stocks with a market capitalization of at least $5 billion. This will limit our search to the largest companies in the market with correspondingly higher quality revenue and the resources to ride out an economic downturn. 

Next, we will search for stocks that have reasonable valuations. We will scan for stocks with trailing P/E ratios of 20 or less and P/B ratios of 2.5 or less.
Last, to find stocks that generate a significant stream of in-come via their dividend, we will limit our search to stocks with dividend yields of 4.5 per cent or more.

What did we find?

sept14

Topping our list is Enbridge Income Fund Holdings. This fund holds a variety of energy infrastructure assets in the United States and Canada including both oil and natural gas pipelines. After struggling in early 2018, the stock has done well since the end of June and is up 10.4 per cent in the past quarter. The stock has a very low P/E ratio of 7.5 and the highest dividend yield on our list at 6.9 per cent.

An interesting result of our screen is that corporate siblings Power Financial Corp., Great-West Lifeco Inc. and IGM Financial Inc., along with parent holding company Power Corp. of Canada, all make our list. All four entities have relatively low valuations and strong dividend yields, the highest of which is IGM Financial at 6.3 per cent.

Trading Central Strategy Builder provides a back-testing capability to evaluate how well an investing strategy would have worked in the past. Using a five-year historical period with quarterly re-balancing, the screen described had a 11.8-per-cent annualized return compared with 5.5 per cent for the S&P/TSX 60 Index and 4.8 per cent for the S&P/TSX Composite Index.

The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Trading Central in respect of the investment in financial instruments. Investors should conduct further research before investing.

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