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Retirement 100 (Fall 2011)

I'm a big fan of the British TV series Jeeves & Wooster, based on the comedic scribblings of P.G. Wodehouse. In the series a young Hugh Laurie (now better known as the acerbic Dr. House) plays the aristocratic and lovably foppish Bertie Wooster who must be regularly rescued by his clever servant Jeeves, played by an impish Stephen Fry. The show revolves around the bother caused by Bertie's newt-addled friends and unusually meddlesome aunts, who constantly interrupt his life of fun and leisure.

But Bertie's carefree lifestyle is the product of inherited wealth and he would be in deep trouble without it. Such is the good fortune of the lucky sperm club. Alas, if you're like me, you weren't born with a silver spoon in your mouth and you have to worry about money. But fear not, there is hope for us common folk. A good dollop of thrift and hard work is all that's required to build up an income portfolio that can generate enough cash to support a comfortable retirement or life of leisure.

When it comes to investing for income, most people should consider adding at least a few good dividend stocks to their portfolio because they can provide a regular, and hopefully growing, series of cash payments. In addition to generating an income, companies that pay dividends tend to be large, mature firms that can more easily cope with changing economic circumstances than smaller firms. Their size and relative stability means that dividend stocks are generally easy to hold. Don't get me wrong - they aren't without risk, but dividend investors often sleep better at night than those who hold other kinds of stocks. That's a nice feature for those who want to relax and have fun instead of constantly watching the markets.

In our annual Retirement 100 listing we endeavour to highlight the best dividend stocks in Canada and the results have been highly satisfactory so far. Our A-graded stocks - we call them our Retirement All-Stars - have gained 39.2%, including dividends reinvested annually, since we started four years ago. When you look at the group of stocks that rated either an A or B, the average gain comes in at 20.3%.

Our long-term results far exceed the returns from the markets overall. By way of comparison, the iShares S&P/TSX Composite exchange-traded fund (ETF), which tracks Canadian stocks in general, has advanced a paltry 2.3% since we started. The iShares Canadian Dividend ETF, which tracks 30 of the largest dividend stocks in Canada, climbed only 6.6% over the same period. That means our Retirement All-Stars have beat the overall market by a staggering 36.9 percentage points over four years, while thrashing Canada's largest dividend ETF by a remarkable 32.6 points.

This year the gains continued to be respectable. Last year's Retirement All-Stars climbed 8.4%, while the S&P/TSX Composite ETF advanced 4.9% and the Dividend ETF moved 5.9% higher. That's not bad considering the downturn the market encountered late this summer.

While we're pleased with these results, we aren't saying that you'll make a fortune by buying every A-rated stock. As the past few years have amply demonstrated, the stock market is about as predictable as Bertie on a bender. On occasion the entire market suffers from a nasty hangover and profits dribble away. Even in more buoyant times when most of the market is partying, individual stocks can suffer from indigestion. Nonetheless, we think the A-rated stocks deserve your attention.

How We Did It

For the Retirement 100 we grade Canada's largest dividend stocks based on their ability to provide generous income to investors for a reasonable price. If you've ever read a report card, you'll be able to understand our grades. The best firms score an A and good ones nab a B. Solid candidates slip through with a gentleman's C while weaker prospects get by with a D or even an F. You can find the grades for all 100 stocks starting on the next page.

The grades themselves are based entirely on the numbers. We didn't factor in any personal opinions about a firm. Instead, we scoured the Bloomberg database for detailed financial information starting with Canada's largest dividend-paying stocks by market capitalization. We then trimmed the initial list to remove candidates that have been around for less than a year or lack the detailed financial data we need for numerical analysis. We then graded the remaining stocks using three primary criteria.

Yield: The more money a firm sends your way, the better. We gave top marks to stocks with high dividend yields. We also reward stocks that have a strong record of dividend growth, because firms that grow their dividends tend to be confident about their future prospects.

Reliability: While a good yield is great, we like it even more when we have some assurance that the dividends will continue to be paid. (Indeed, sometimes an extraordinarily high yield can be a warning sign, which is why we employ a bevy of additional tests.) As a result, we reward stocks that have earned more than they pay out in dividends because stocks that pay dividends that aren't backed up by earnings will eventually be forced to cut them. We also give additional marks to firms with little debt because balance sheets stuffed to the brim with debt are risky. To measure each firm's reliance on debt we compare its debt-to-equity ratio against other companies in the same industry.

Value: On the value front we want to be able to buy lots of assets for a low price. As a result, better grades went to companies with moderate-to-low price-to-book value (P/B) ratios. This number compares the market value of a company to how much cash you could raise by selling off the company's assets (at their balance sheet prices) and paying off the firm's debts. Low P/B ratios provide some assurance that you're not paying much more for a stock than its parts are worth. We also prefer profitable stocks with lower price-to-earnings ratios.

Putting all of these factors together we arrived at the final grades for each of Canada's largest 100 dividend stocks. In total, only six earned an A, but 18 managed a solid B this time around. We believe both A and B stocks are worth your consideration.

Retirement All-Stars
GREAT-WEST LIFE (GWO)
HUSKY ENERGY (HSE)
POWER CORP OF CANADA (POW)
POWER FINANCIAL (PWF)
SUN LIFE FINANCIAL (SLF)
TD BANK (TD)
As of September 9, 2011


You should also keep in mind that the numbers only provide part of the story. Savvy investors look for businesses with unique or intangible features that might not be reflected in the hard numbers. It's best to use our grades as the foundation for your own research and build from there. Like any screening strategy, the purpose of the Retirement 100 is to help you spot a few good ideas that you can then investigate in more detail.



Download the Retirement 100 table (a .xls file)




First published in the November 2011 edition of MoneySense magazine.

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    Top Trusts 2006
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