Nick Majendie, director and senior portfolio manager of Majendie Wealth Management at Scotia McLeod, the brokerage arm of The Bank of Nova Scotia, is targeting dividend-paying stocks as a major component of his portfolios. And it comes as no surprise to him that the best names in the dividend-paying category are Canadian.
“What I would like to highlight here is that Canada does have a much greater proportion of solid dividend-paying companies where we see the potential for sequential increases in dividends over the next five years,” said Majendie, whose calculations show an average five-year earnings growth rate of just under 7% for the 30 companies in his balanced portfolio, which excludes commodities. “And the dividend-per-share growth rate, we estimate over the next five years, will be 5%. If you take the current yield plus the long-term earnings growth rate, if P/E multiples don’t change, you should get a healthy double-digit return from that type of portfolio.”
Majendie also points out the dividend yield on the S&P/TSX is similar to Canada’s bond yield, whereas U.S. stocks are much less competitive with U.S. bonds on a yield basis.
“In Canada, the S&P/TSX, which has 200-odd stocks in it, has a yield of almost 3% – about 2.9% to be precise – whereas the Government of Canada 10-year bond yields about 3.5%,” Majendie explained. “When you compare [dividend-paying securities] with competing bond yields, some of these companies, particularly in Canada, have very attractive dividend characteristics; and this is one of the key themes that they are espousing not just for this year but also for the next number of years.”
Also take into account the fact that Canada’s banks are in a much better position than their U.S. counterparts – and that Canada’s TSX has outperformed the U.S. every year since 2000 – and it seems some of the highest-yielding stocks have gone north.
“If you did consider the change in currency, the Canadian dollar in 2000 was in the mid- to high 60s and it is now in the mid-90s,” Majendie said. “Thus, as a Canadian investor, you would have been a further 30% better off by investing in Canada versus the U.S. We think that’s the overall context.”
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