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Mike

Canadian Dividend Rock Stars List

The Canadian Rock Stars List is a selection of the safest dividend stocks in Canada. Which Canadian dividend stocks are the best? Those with the highest yield? Or those with the strongest dividend growth? Moose Markets presents you with the Canadian Dividend Rock Stars list: a selection of Canadian companies showing both income and growth. You guessed it; we prefer a combination of dividend growth and dividend yield. Here’s why…

 

DOWNLOAD THE LIST HERE

 

Dividend Growth Investing = Safe Investing with More Money, Less Stress

“When you have confidence, you can have a lot of fun. And when you have fun, you can do amazing things.”

~Joe Namath

My entire portfolio is invested in dividend growth stocks. Some holdings act as “fixed income” as they offer a stable dividend yield and can weather market storms. Some others are my “growth equity” as they offer lower yield, but strong dividend growth and stock price appreciation potential. The combination of various dividend growers will create a balance where your portfolio will help you retire stress-free.

Strangely enough, even Vanguard (a pioneer in ETF investing) conducted its own studies on the recent market history and concluded that dividend growers are among the best-performing assets.

dividend growth investing

Source: Vanguard

According to Vanguard’s study over this 20-year period, dividend growth stocks not only beat the market, but they did it with less volatility. While dividend growers usually provide investors with less volatility, you will still go through challenging periods where your favorite holdings will show red numbers. This is where you may start losing confidence and start wondering if it would be appropriate to cash your profits and protect your capital.

GET THE LIST

How the Canadian Rock Stars List Has been Built?

This Canadian dividend stocks list has been created with the help of our investment membership; Dividend Stocks Rock. When we left in our small RV to drive down to Costa Rica, we lived the adventure of a lifetime. It was a wonderful experience because we had a clear strategy. We knew where we were going, why we were doing it and we even had ways to handle more difficult days. The market will keep throwing you curveballs, so let’s make sure you don’t whiff on them.

At Dividend Stocks Rock, we also have a clear strategy: we focus on dividend growth stocks. We handpick companies showing a strong dividend triangle (e.g. revenue, earnings, and dividend growth potential) and make sure we understand their business model. It is sometimes frustrating to follow such a clear, but strict strategy. We sometimes must ignore great investing opportunities because they don’t fit in our model. Since our model is quite easy to understand and we know why we are using it, we never doubt ourselves.

We have created the Canadian Rock Stars list based on the combination of three metrics creating the dividend triangle. It’s a stronger list compared to the dividend aristocrats as we combine various metrics on top of dividend growth. By filtering the market to find Canadian stocks showing growing sales, growing earnings and growing dividends, we are convinced we can pick among the best Canadian dividend stocks, period.

Download the list

The Dividend Triangle is key to identifying safe Canadian stocks

With a smart combination of three metrics, you’ll be able to pick the best stocks from our list. You can quickly identify safe investments using the dividend triangle:

Revenues:

A business is not a business without revenues. What is the difference between a company with growing revenues versus a company showing stagnating results? We are looking for companies with several growth vectors that will ensure consistent sales increases year after year. I’m a big believer in “offense is the best defense”. Whenever we are about to face a recession, I want to make sure I have companies that have shown past revenue growth. This is an excellent indicator that their business model is doing well, and they won’t enter a recession in a position of weakness.

Earnings:

You cannot pay dividends if you don’t earn money. Then again, this is a very simple statement. Still, if earnings don’t grow strongly, there is no point of thinking that the dividend payment will increase indefinitely. Keep in mind that the EPS is based on a GAAP calculation. This is what makes EPS imperfect, as accounting principles are not aligned with cash flow. This means you are better off looking at the EPS trend over 3, 5, and 10 years. Use an adjusted EPS that discounts those one-time events revealed by the company to have a clear view of what is happening. Some companies could “play around” with earnings for a year or two, but you can’t create a trend out of thin air.

Dividends:

Finally, dividend payments are the *obvious* backbone of any dividend growth investing strategy. But I don’t focus on the real dollar amounts or the yields because our real focus is solely on dividend growth. Dividend growers show confidence in their business model. This is a statement claiming that the company has enough money to both grow their business and reward shareholders at the same time. This also tells you that the business can pay off its financial obligations and invest in new projects (CAPEX). No management team will increase their dividend if they lack the cash to run their business.

What does a Strong Dividend Triangle Look Like?

It’s one thing to put those metrics into a stock screener, but it’s another to know what to do with them. The problem I face with a simple stock screener is that it will give me the 3year or 5year annualized growth, but I can’t see the trend.

Once I identify a company with a strong dividend triangle, my second step will be to look at the trend over the past 5 years for each metric. This period is long enough to show the current trend and highlight some jumps or drops that I must investigate. For example, I’ve pulled the dividend triangle of one my favorite stocks: National Bank:

national bank

As you can see, revenue, earnings, and dividend follow a similar trend. There was a decrease in earnings during the pandemic which led to a pause (forced by regulators) of dividend growth. Now that the pandemic is behind us, National Bank is back on the Rock Stars list with a strong dividend growth potential.

Canadian Rock Stars List

Canadian Dividend Stock List Metrics

The Canadian Dividend Rock Stars list is comprised of only Canadian stocks that show a minimum revenue and earnings growth of 1% for the past five years. We could have asked for higher requirements, but considering the pandemic, we wanted to make sure we capture all dividend growers that deserve to be a Rock Star. While we didn’t include a minimum yield (dividend yield on this list goes from 0.29% all the way up to 15%), we required a minimum dividend growth rate of 5%. As you know, dividend growth = more money and less stress.

Building a list with only three metrics would not give you enough information for your research. For this reason, the Canadian Dividend Rock Stars list includes around 40 financial metrics. You can then use the filter you want to identify the perfect Canadian stock for your portfolio. The Rock Stars list also includes some of Refinitiv Starmine scores:

StarMine Credit Score

The current regional 1-100 percentile rank of a company’s 1-year default probability is based on the StarMine Combined Credit Risk Model. The Combined Model blends the Structural, SmartRatios, and Text Mining Credit Risk models into one final estimate of credit risk at the company level. Higher scores indicate companies that are less likely to go bankrupt, or default on their debt obligations, within the next 1-year period.

The combined credit score includes metrics from three different models:

  • Structural: Structural leverage, asset volatility, and asset drift.
  • SmartRatios: profitability, leverage, coverage, liquidity, and growth & stability
  • Text mining: transcripts, Reuters news, filings, research

As you can see, the credit score is a combination of the business finance structure, ratios, and how artificial intelligence analyzes the company’s news and transcripts. Pretty powerful metrics!

StarMine ESG Score

Refinitiv ESG Combined Score is an overall company score based on the reported information in the Environmental, Social, and Corporate Governance pillars (ESG Score) with an ESG Controversies overlay. The ESG score you find in the stock screener shows the combined scoring of the four factors mentioned above. Here is an example of how 3M (MMM) Controversies score has fallen because of their lawsuits in 2018-2019:

This scoring gives you a particularly good idea if the company is a good corporate citizen. Since MMM has a good reputation overall besides those legal incidents, the overall ESG score is positive:

The score you will find in the stock screener is rated from 1 (worst) to 100 (best).

StarMine Value Score

The current regional 1-100 percentile rank of the security is the overall Relative Value Model. Higher scores indicate stocks with the best value when considering all Relative Value model components that are relevant for the stock.

The relative valuation model will use a combination of 6 valuation metrics:

  • EV/Sales
  • EV/EBITDA
  • P/E
  • Price/Cash Flow
  • Price/Book
  • Dividend Yield

Download the Canadian Dividend Rock Stars List

This Canadian dividend stocks list will be updated quarterly. By subscribing to our newsletter, you will receive the updated version of the Rock Stars list quarterly.

You can download the list here.

Happy stock research!

Best Canadian Dividend ETFs

Did you know you can get the best dividend stocks in dividend ETFs? Dividend investing has been one of the most successful strategies for investors in the past 50 years. If you wish to use dividend growth investing to your advantage but don’t want to bother selecting individual stocks, you can choose among several dividend-paying ETFs.

How to select the best Canadian dividend ETF?

Using the Dividend Stocks Rock ETF screener, we can find information on 234 ETFs showing a minimum dividend yield of 1%. You can slash that list by 50% by looking for an ETF with a minimum yield of 3% (122).

Click here to download the complete list of the best dividend ETFs

But going for an ETF based on a yield isn’t enough. There are several criteria you should consider. 

How to Analyse ETFs

As is the case with any investment product, ETFs may track the same asset or follow the same investing strategy, but they are not created equal. There are a few things you must consider before making your decisions. We use the Dividend Stocks Rock (DSR) ETF screener for our analysis but you can go through the best dividend ETFs by going to each investment’s firms ETF section and read their prospectus.

Financial metrics

In the DSR ETF screener, you will find a good list of metrics to analyze ETFs. The year to date, 1yr, 3yr, and 5yr returns will tell you much about the performance of the ETF. It is then easier to know what to expect from this product and make comparisons.

The expense ratio is also very important since you can then pick the cheapest (and hopefully best performing) ETF for a specific sector. If you can’t decide between two similar ETFs, pick the one with the cheapest fees. It is likely the one that will have the best chance of performing well in the future.

Volume and assets under management (AUM) will tell you more about the liquidity and the size of the ETF. It’s important to invest in assets that are liquid and big enough to not be the latest flavor of the month.

The historical spread will also give you an idea on the ETF’s volatility (the wider the spread, the higher volatility). This could have a big impact on price fluctuations during a market crisis. We saw how some preferred shares and bond ETFs plummeted in March of 2020.

The discount/premium to NAV (net asset value) will tell you if you are paying more than what the ETF is worth or if you are getting a bargain. In general, you want this number to be as close to zero as possible in order to buy at the right price.

ETF analysis

While you can easily make your selection based on basic metrics, but if you want exposure to commodities, or bonds, you must perform a few additional checks if you want an ETF that includes equities.

Once you have selected a pack of ETFs that might work with your portfolio, you still have some work to do. The ETF analysis must include the comprehension of the investment strategy. You can usually find this information from the ETF manufacturer (the financial firm managing and selling the ETF). Here’s an example from VIG:

“The investment seeks to track the performance of the S&P U.S. Dividend Growers Index that measures the investment return of common stocks of companies that have a record of increasing dividends over time. The adviser employs an indexing investment approach designed to track the performance of the index, which consists of common stocks of companies that have a record of increasing dividends over time. The adviser attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index.”

Some are obviously more complicated or opaque than others. Here’s ZWB.TO, a covered call ETF:

“BMO Covered Call Canadian Banks ETF seeks to provide exposure to the performance of a portfolio of Canadian banks to generate income and to provide long-term capital appreciation while mitigating downside risk through the use of covered call options.”

You know they will use covered call options, but you won’t know much about how their option writing process works with this information. If you are curious, you can also read more in the ETF prospectus also found on the company’s ETF website.

The second step is to check the ETF’s top holdings. This is usually my favorite part as it will quickly determine if this ETF could fit in my portfolio or not. By looking at the top 10 holdings, you will see what drives this investment. If you cringe on one or two company names, you might want to skip this one and select an alternative ETF.

The third step will require you to look at the ETF sector allocation. At DSR, we are currently able to give you the ETF sector if it’s a single sector ETF, but we can’t ventilate several sectors. To do that, you must go to the ETF’s website and look at the graph provided by the financial firm. Looking at how the ETF is invested throughout various sectors will allow you to better predict the impact on your portfolio’s volatility and upside/downside potential. This extra step requires more calculations, but it is crucial for you to include your ETFs allocation in your portfolio.

Finally, I wouldn’t overcomplicate things when it comes down to ETF investing. ETFs have been created to be efficient and simple to understand. Once you have selected the asset exposure you desire, look at a few financial metrics and confirm your choice by looking at what’s inside the hood. If you attempt to track each ETF movement and change in allocation, you may spend as much time as you would have if you selected individual stocks. The power of ETF investing resides in the simplification of your investment strategy. Therefore, if you end up with a dozen ETFs following various patterns, you haven’t necessarily improved your portfolio quality or simplicity.

Best Performing Dividend ETFs (last update May 2022)

While you may be investing in ETFs for the yield, the total performance is also important. Since the beginning of the year, the best performing dividend ETFs are all coming from the same sector… the energy sector!

Horizons Enhanced Income Energy ETF (HEE.TO)

ETF yield: 5.33%

Expense ratio: 0.85%

Total return ytd: 38.00%

CI Energy Giants Covered Call ETF unhedged (NXF.TO)

ETF yield: 7.02%

Expense ratio: 0.72%

Total return ytd: 27.60%

Harvest Energy Leaders Plus Income ETF A Units (HPF.TO)

ETF yield: 4.09%

Expense ratio: 1.50%

Total return ytd: 26.34%

My Favorite Dividend ETFs

Based on the above-mentioned factors, here are some of our favorite dividend-paying ETFs:

Psst, looking for more yield? Here’s an article about covered covered call ETFs

Brompton Global Dividend Growth ETF (BDIV.TO)

ETF yield: 5.33%

Expense ratio: 0.75%

Nb. of holdings: 44

Brompton Global Dividend Growth ETF is offering a generous yield, but you have to pay a steep price (almost 1% in management fees). BDIV.TO shows a strong concentration in information technology (21%), healthcare (14.4%), and the financials sector (14%). Among their largest dividend holdings, we like Canadian Natural Resources (CNQ.TO), AbbVie (ABBV), and Broadcom (AVGO).

Harvest Tech Achievers Growth & Income ETF Class A (HTA.TO)

ETF yield: 6.02%

Expense ratio: 0.99%

Nb. of holdings: 24

We like when ETFs aren’t overcomplicated. Harvest Tech Achievers Growth & Income ETF only includes 24 stocks. By looking at their holdings, you will realized they are all U.S. stocks and they don’t necessarily pay a high dividend (Meta Platforms, Visa, Qualcomm, SalesForce and Microsoft are the top 5 holdings). How do they generate a high yield? by writing covered calls.

BMO Equal Weight Utilities Index ETF (ZUT.TO)

ETF yield: 3.21%

Expense ratio: 0.61%

Nb. of holdings: 18

The BMO Equal Weight Utilities Index ETF shows a straightforward investing strategy in Canadian utilities, which are known to be among the best dividend payers. Among the top holdings, you will find common names such as Brookfield Infrastructure, Canadian Utilities, Hydro One, Fortis and Emera. This is a “sleep well at night” dividend ETF.

BMO EQUAL WEIGHT BANKS INDEX ETF (ZEB.TO)

ETF yield: 3.37%

Expense ratio: 0.60%

Nb. of holdings: 6

Canadian banks are known to be among the best dividend growth stocks on the Canadian market. This dividend ETF tracks the big six with equal weight: The Toronto-Dominion Bank(TD.TO), Bank of Montreal (BMO.TO), Royal Bank of Canada (RY.TO), National Bank of Canada (NA.TO), Bank of Nova Scotia (BNS.TO), Canadian Imperial Bank of Commerce (CM.TO)

Vanguard FTSE Canadian High Dividend Yield Idx ETF (VDY.TO)

ETF yield: 3.40%

Expense ratio: 0.22%

Nb. of holdings: 46

If you are looking for a more broad dividend ETF, the Vanguard FTSE Canadian High Dividend Yield Index ETF should probably be on top of your list. With an average yield above 3% and 100% Canadian content, you will be well served. We find a good concentration in Canadian Banks, Energy, and Telecom stocks. 

iShares Canadian Select Dividend Index ETF (XDV.TO)

ETF yield: 3.88%

Expense ratio: 0.55%

Nb. of holdings: 32

The iShares Canadian Select Dividend Index ETF is similar to DVY.TO but offers a higher yield (it is also more expensive). Again, you will find the classic dividend suspects with banks, energy stocks and telecoms. You will also find a few more interesting dividend stocks such as Canadian Tire (CTC.A.TO) and Labrador Iron Ore Royalty (LIF.TO) among their top 10!

So, which is the best dividend-paying ETF?

There are many answers to this question. The best Canadian dividend ETF is likely the one that will fit with the rest of your portfolio. If you are a beginner investor and you are looking for a diversified dividend ETF, the best choice is probably the Vanguard FTSE Canadian High Dividend Yield Idx ETF (VDY.TO) or the iShares Canadian Select Dividend Index ETF (XDV.TO). However, if you are retired and you focus on income, you might want to look at covered call ETFs.

Covered Call ETFs – Income Strategy

Many Canadians have used dividend investing to generate a stable source of income. But did you know you could increase this income? By writing covered call options on your holdings, you can boost your investment revenue. Since not all investors are comfortable writing options, financial firms have created covered call ETFs.

Covered call ETFs are dynamically managed funds that provide you exposure to dividend stocks on top of writing covered calls. This strategy generates additional revenue through the sale of each option. Therefore, you don’t need to worry about anything as a professional takes care to boost your investment yield.

While a dividend stock paying a yield above 5% could raise a red flag for many investors (there is no free lunch in finance), it’s relatively easy to find a safe covered call offering a better yield.

Let’s analyze three of the highest-yielding Canadian covered call on the market.

ZWG – BMO Global High Dividend Covered Call ETF

This is a relatively new covered call ETF that focuses on a wide variety of companies worldwide. It currently writes covered calls on around 50 stocks to produce a yield close to 7% and a low beta of 0.74. ZWG looks like a perfect fit for an investor looking for a high income and some stability (beta under 1).

BMO Global High Dividend Covered Call ETF

The first thing I look at when I analyze ETFs is the composition of the top ten holdings. I can rapidly identify if I want to invest in the ETF’s favorite companies. For BMO Global High Dividend Covered Call ETF, the top ten represent 38% of all holdings. You can find big names such as Microsoft (MSFT), Home Depot (HD), and McDonald’s (MCD).

ZWG is geared to generate growth and perform during a bull market with a concentration in information technology (24%), financials (17%), and consumer discretionary (14%) sectors. With 70% of U.S. exposure, it’s not as diversified as expected.

BMO Global High Dividend Covered Call ETF allocation

We wanted to compare the BMO Global High Dividend Covered Call ETF total return against the Vanguard Dividend Appreciation ETF (VIG) and an S&P 500 ETF (SPY). We want to see if it was worth it to invest in a covered call ETF instead of following a dividend growth investing strategy or simply buying an index. While the covered call ETF is underperforming the other two investment strategies, results aren’t meaningful considering ZWG was created in January 2020.

BMO Global High Dividend Covered Call ETF total return

Let’s move to a covered call ETF that was created in 2017…

ZWC – BMO Canadian High Dividend Covered Call ETF

The Canadian high dividend covered call ETF is similar to the Global High Dividend Covered Call ETF, but it has a more extended history and focuses on Canadian equities. The yield is lower (6%), but you avoid currency fluctuations since all money is invested in Canadian equities. ZWC also pays a monthly dividend and shows similar management fees (around 0.72%).

ZWC - BMO Canadian High Dividend Covered Call ETF

Out of 35 positions, the top ten represent 47% of ZWC. Unfortunately, this covered call ETF composition looks a lot like the TSX. There is a strong concentration in the financials (38%) and energy (15%) sectors. You will find 4 Canadian banks and a life insurance company among the top ten. This portfolio would be very easy to replicate in your brokerage account if it wasn’t for the covered call option strategy.

ZWC - BMO Canadian High Dividend Covered Call ETF allocation

We used the iShares Canadian select dividend ETF (XDV.TO) and a TSX index ETF (XIU.TO) to see how the BMO Canadian High Dividend Covered Call ETF fares against other strategies. This time, we had a better time horizon (around 5 years). However, the conclusion is the same: the covered call ETF underperforms both dividend investing and index investing strategies.

ZWC - BMO Canadian High Dividend Covered Call ETF total return

Now, let’s move on to Canadian’s favorite covered call ETF: ZWB – BMO Covered Call Canadian Banks ETF!

ZWB – BMO Covered Call Canadian Banks ETF

This covered call ETF is pretty straightforward: it writes call options on the big six Canadian banks. We like that this ETF exist since 2011 as it gives us a long history to study. The management fees are similar to the other two covered call ETF (0.72%) and ZWB provides a yield of 6% with a beta in line with the market (1.00). You’ll notice the etf includes seven holdings…

ZWB - BMO Covered Call Canadian Banks ETF overview

The most important position of the BMO Covered Call Canadian Banks ETF is… another ETF! The BMO Equal Weight Banks Index (ZEB.TO) represents about a quarter of the total holdings. You then find the bix six:

ZWB - BMO Covered Call Canadian Banks ETF allocation

Since Canadian banks tend to outperform the market due to their unique position in an oligopoly and the ETF is relatively simple (it includes only six companies), we thought of comparing ZWB to the investment return of each of the big six. Surprisingly, the covered call strategy greatly underperforms the average return from the six banks. The covered call ETF generated a total return (capital + dividend) of 163% during the period, while the average performance of the six banks reported 256% on average. Unless you are a big fan of ScotiaBank (149%), you would have done better if you had selected any other banks vs. the ETF!

ZWB - BMO Covered Call Canadian Banks ETF total return

Final Though

We can appreciate the interest in high-yielding investment products. Covered call ETFs provide a monthly source of income, and their yield is way above what the market offers. 

However, keep in mind that you leave a lot of money on the table if you choose covered call ETFs instead of investing directly in the companies’ stocks. 

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