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Retirement 100 (Fall 2012)

Gardening is a relaxing pastime. Watching your plants grow and prosper until they produce a bountiful harvest can be highly rewarding. As far as I can tell the only downside of the hobby is its tendency to generate a surplus of zucchini, which I like about as much as George H. W. Bush enjoys a steaming pile of broccoli.

Like avid gardeners, conservative investors want their stock dividends to grow. They aren't in it for a quick trade and, instead, follow a slower steadier method that requires only a little weeding and pruning from time to time. It's an approach that has allowed more than a few investors to enjoy a comfortable retirement. To help you find a profitable path to life after work, we scour the Canadian stock market every year for a few good dividend stocks to plant in your portfolio for the Money Sense Retirement 100.

We're happy to report that, so far, our results have been highly satisfactory. Our A-graded stocks have climbed a total of 52.6% since we started in 2007. Stocks rated either A or B have advanced by an average of 32.2%. More impressively, the profits were obtained during a period which included the largest market crash since the great depression of the 1930s. Indeed, the iShares S&P/TSX Composite exchange-traded fund (ETF), which tracks Canadian stocks in general, advanced a mere 2.9% since we began. The iShares Canadian Dividend ETF, which tracks thirty of the largest dividend stocks in Canada, gained 14.5% over the same period.

Since last year our A-graded stocks moved 9.6% higher, on average, and the stocks rated either A or B advanced 10.0%. Once again the Retirement 100 bested the iShares S&P/TSX Composite ETF which climbed only 0.6%. In addition, the iShares Canadian Dividend ETF trailed with returns of 7.4%. (These performance figures include dividends that are reinvested each year.)

While we're very happy with our results so far, 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 can be a wild and woolly place where some years are good and others disappoint. Nonetheless, we think the A-rated firms deserve your attention.

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 read a report card, you'll be able to understand our grades. The best of the bunch get an A and good ones nab a B. Solid candidates slip through with a C while weaker prospects are sent home with a D or even an F.

The grades themselves are based entirely on the numbers. We didn't factor in any personal opinions about a firm. Instead, we turned over 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 firms that have been around for less than a year or lack the detailed financial data we need to crunch the numbers.

The grades are based on 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 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 5 earned an A, but 17 managed a solid B this time around. We believe both A and B stocks are worth your consideration.

Retirement All-Stars
BANK OF NOVA SCOTIA (BNS)
GREAT-WEST LIFECO (GWO)
POWER CORP OF CANADA (POW)
POWER FINANCIAL (PWF)
TORONTO-DOMINION BANK (TD)
As of September 6, 2012

We were pleased to see four top stocks from last year make the grade again. Great-West Life (GWO), Power Corporation (POW), Power Financial (PWF), and TD Bank (TD) all got As again this year. (You should recognise that three of the stocks are closely related. Power Corporation owns more than 66% of Power Financial which is turn owns more than 60% of Great-West Life.) New to the A list, Scotiabank joined the old timers after growing its book-value-per-share solidly over the last year.

On the whole dividend stocks are generally pricier than they were last year. (They're also well up from the lows seen in the spring of 2009.) Not only are prices up, but price-to-book-value ratios and price-to-earnings ratios are higher which is less than encouraging for bargain hunters. Dividend stocks are simply not the bargains they used to be. As a result, it is seems wise to expect more moderate returns in the future.

You should keep in mind that the numbers are only part of the story. Smart investors look for businesses with unique, or intangible features, that might not be reflected in the hard numbers. Sometimes these features are beneficial, such as understated assets or a competitive advantage but at other times they can be detrimental. Perhaps the firm has environmental liabilities to clean up or it might be facing a raft of new competitors. It is well worth your time to consider such possibilities.

It's best to use our grades as the starting point for your own research and then build from there. Importantly, before buying any stock, make sure that its situation hasn't changed significantly. Read press releases, regulatory filings, and recent news stories to get up to speed on the company. 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 2012 edition of MoneySense magazine.

Past Retirement 100 / Income 100 / Top Trusts Articles

    Retirement 100: Fall 2011
    Retirement 100: Fall 2010
    Income 100: Summer 2009
    Income 100: Summer 2008
    Income 100: Summer 2007
    Top Trusts 2006
    Top Trusts 2005

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