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Income 100: Summer 2009

Do you dream of relaxing on a sunny beach, drink in hand, while your stocks pay for your vacation? To help get you to that beach, I've ranked the largest stocks in Canada based on their ability to put cash into your wallet.

Before I reveal this year's top picks, let's check out how last year's crop of Income 100 stocks performed. I'd love to be able to tell you that last year's stocks were so profitable that I'm living it up on the sunny shores of the Caribbean. Unfortunately, a bruising bear market cancelled my siesta.

The iShares S&P/TSX Composite exchange-traded fund (ETF) plummeted 30.7% over the last year and that includes non-reinvested dividends. The iShares Canadian Dividend ETF, which tracks thirty of the largest dividend stocks in Canada, lost 22.1%.

When it came to the Income 100, there was some good news and some bad news. The good news is the top income stocks - those rated A - outperformed the Canadian Dividend ETF by 7.1 percentage points and they bested the S&P/TSX Composite ETF by a whopping 15.6 percentage points. The bad news is that, despite trouncing the indexes, the A-graded Income 100 stocks still lost 15.1%. Those rated A or B lost an average of 20.4%.

Dividend stocks were added to the Income 100 in the summer of 2007 and, thus far, it has been a rocky road. Since then the iShares Dividend ETF declined 27.6% and the S&P/TSX Composite ETF fell 27.0%. The A-graded Income 100 stocks declined 18.9% and the A-or-B group averaged a loss of 22.8% over the same period. Again that's much better than the indexes, but a loss is still a loss. Nonetheless, I fully expect that the tide will turn over the next few years.

If current downturn has been hard on stocks, it's been murder on the magazine business. Revenue from ad sales has fallen off a cliff and once fat magazines are now suffering from anorexia. As a result, there wasn't room for the Income 100 in this summer's MoneySense magazine. Alas! Nonetheless, I like dividend stocks and decided to continue the Income 100 tradition on my own.

Mind you, I also took the opportunity to drop income trusts. I admit to being not particularly keen on trusts. (It doesn't help that trusts are about to be whacked by new taxes which are slated to come into effect in early 2011.) So, I'll just stick to good old-fashioned dividend stocks this year.

My goal is to rate Canada's largest stocks based on their ability to provide generous income to investors for a reasonable price. Although I've used some serious math to arrive at the ratings, the results can be understood by anyone who's read a report card. The best firms score an A and good ones land a B. Solid but unspectacular candidates slip through with a C. Those that miss the mark get a D or even an F.

I'm definitely not saying that you can make a fortune by buying every A-rated stock. The past few years have amply demonstrated that the stock market just isn't that predictable. But I think A-rated firms deserve your attention. Similarly, income investors should be cautious when it comes to bottom of the class stocks.

The grades are based purely on the numbers. I didn't factor in any personal opinions about a sector or a firm. Instead, I scoured the Bloomberg database for detailed financial information. I started with Canada's largest dividend paying stocks by market capitalization. I then trimmed the initial list to remove candidates that have been around for less than a year, or lack the robust financial data needed for detailed analysis. Finally, I doled out marks based on three criteria:

Yield

The more money a firm puts in your pocket, the better. I gave top marks to those stocks with high dividend yields and robust dividend growth.

Reliability

I like to see a high yield, but I like it even more when I have some assurance that the yield will continue to be paid. As a result, I reward stocks with a high ratio of earnings to dividends. I gave additional marks to firms with little debt because balance sheets riddled with debt are riskier than those of less leveraged businesses. I measure each firm's reliance on debt by comparing its debt-to-equity ratio against its peers in the same industry.

Value

On the value front I want to be able to buy lots of assets for a low price. So, higher grades went to firms with moderate-to-low price-to-book-value ratios. I also prefer stocks with low price-to-earnings ratios.

Putting all of these factors together I arrived at final grades for each of Canada's largest 100 dividend stocks. In total, only 10 earned an A, but 15 managed a solid B. I think both the A and B groups are worth your consideration.

The Top Income 100 Stocks
Amazing "A" Stocks
Canadian Utilities(CU, $34.40)
Canadian Western Bank (CWB, $13.30)
Corus Entertainment (CJR.B, $16.25)
Fairfax Financial (FFH, $309.49)
Husky Energy (HSE, $29.09)
Laurentian Bank (LB, $28.68)
Methanex (MX, $12.08)
Reitmans (Canada) (RET.A, $11.97)
Russel Metals (RUS, $12.49)
TD Bank (TD, $47.43)
Bullish "B" Stocks
ATCO (ACO.X, $34.92)
Bank Of Montreal (BMO, $39.91)
Biovail (BVF, $13.68)
Brookfield Properties (BPO, $9.04)
Canadian Tire (CTC.A, $50.23)
Emera (EMA, $19.90)
Encana (ECA, $54.46)
Ensign Energy Services (ESI, $13.29)
Petro-Canada (PCA, $37.65)
Power Corp (POW, $22.40)
Power Financial (PWF, $23.55)
Talisman Energy (TLM, $14.35)
Telus Corporation (T.A, $28.44)
Transalta (TA, $19.55)
Transcanada (TRP, $30.05)
As of April 28, 2009


Keep in mind that numbers can never tell the entire story. Smart investors are always on the lookout for businesses with unique, or intangible features, which might not be reflected in the hard numbers.

The best way to use these grades is as a starting point for your own research. Before buying any stock, make sure that a firm's situation hasn't changed in an important way. Read press releases, regulatory filings, and recent news stories to get up to speed on the latest developments. Like any screening strategy, the purpose of the Income 100 is to help you spot a few good ideas that you can then investigate in more detail.

Download the Income 100 table (a .xls file)
(We hold some of these stocks.)

Past Income 100/Top Trusts Articles

    Income 100: Summer 2008
    Income 100: Summer 2007
    Top Trusts 2006
    Top Trusts 2005

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