Just as one bad apple can ruin a basket of fruit, one lousy stock can sour a portfolio. The blame for the sub-zero performance of last year’s top 10 dividend payers, ranked by Canadian Business in its annual Investor 500 guide, fell squarely on a single stock, without which this basket would have rewarded investors with a 7% gain.
The offender was Torstar Corp., whose shares fell 70%, even when dividends are factored in. With its yield above 7% at this time last year, the warning signs were there.
You won’t find Torstar on Canadian Business’s 2016 list, but you will find another media company, Corus Entertainment. Its 9.1% yield is higher than Torstar’s was a year ago. So should you be concerned? Not necessarily. Before we even look to see which companies on the Investor 500 boast the highest yields, we run our list through several filters. First, we kick out companies with payout ratios above 60%, since at this level investors wisely question whether companies can maintain that payout should earnings take a hit. Second, we only want companies that have a history of dividend growth of at least 5% over the past five years.
Apply those conditions to Corus, and you’ll find its payout ratio is just 24%, the second-lowest of the 10 companies we identify below. While the dividend may not be at risk, it is worth noting that analysts never really warmed to the company’s $2.7-billion acquisition of Shaw Media. So this is a stock that warrants further study.
Investors should also pay close attention to Dorel Industries and Evertz Technologies. Both companies currently have payout ratios edging close to our 60% cut-off. Based on the analyst sentiment, be wary of Dorel. Shares of the furniture maker are currently trading above the consensus target price. Analysts don’t seem to have the same concern about Evertz’s payout ratio, but we still advise checking the stock for bruises before adding it to your fruit bowl.
Even with the drag from Torstar, last year’s batch of dividend stocks handily beat the performance of the S&P/TSX 60, which illustrates two points: There’s merit to the methodology, and a well-constructed portfolio will manage to overcome its disappointments.
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