5i Filter - Sustainable Dividend Growth

Michael Southern Jan 05, 2016

For this iteration of the 5i Filter, we have highlighted dividend-paying companies that offer an attractive yield and have aggressively grown dividends over the past five years. In addition to dividend growth, we have also tried to screen for companies that are growing the dividend in a sustainable manner by looking at the dividend payout ratio based on both earnings and cash flow from operations. Filter specifics include the following:

  • Dividend yield between 2.0% and 4.0%
  • Dividend 5-year CAGR > 10.0%.
  • Payout Ratio (based on earnings) < 70.0%
  • Payout Ratio (based on cash flow from operations) <= 55%

There is a mixture of sectors across the filter (ranked by dividend yield), which we think is a reflection of the poor performance of the general Canadian market over the past year. This has led to dividend yields rising to interesting levels for many names that are less likely to be considered as your typical dividend company, such as AutoCanada. 

Many of our readers will be aware that we prefer to use cash flow based payout ratios over earnings, as dividends are actually paid out from cash flows and not earnings. To be fair, using free cash flow to the firm and to equity is most appropriate but gets a bit more complicated for these purposes. It sounds like a matter of splitting hairs, but when you are evaluating a company that has a payout ratio in the 90% to 110% range, it can be the difference between a cancelled dividend and a sustainable one. All stocks presented above have a cash flow payout ratio less than 55.0%. This level should allow the companies to maintain the dividend at current levels and also provide further space for growth in the dividend as well as company growth through capital expenditures.

We also note the absence of the telecommunication sector from our list and the lack of utility and financial sector names. This outcome reflects the filter requirement for a 5-year dividend CAGR above 10%. Telecommunication, financial and utility stocks do have a good record of growing dividends, but the 10% threshold over a 5-year period is a high bar to clear for many companies.

As always, these filters are simply a means for generating investment ideas and not a recommendation to buy or sell any of the securities on this list. Think of it as a starting point and don’t forget to sign up to the blog below for more filters and free content. 

7 comments

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D
David
Jan 16, 2016
Please run again for 4 to 7 to include "income stocks" and some REITS.
Thanks
M
Michael
Jan 10, 2016
Hi Douglas - increasing the period to 10 years results in the following drop-offs: ACQ, CIX, EMA, IIP_U, ACO.X, MDF, ARE, IFC, PJC.A
V
Valerie
Jan 6, 2016
Very helpful, thank you - I especially like the div to cf filter.
D
Douglas
Jan 6, 2016
What companies fall off the list if the dividend requirement is 10 years rather than 5?
N
Noel
Jan 5, 2016
Good comments - Thanks.
M
Michael
Jan 5, 2016
Hi Noel, its Michael from 5i. Thanks for the question. If we expand the screen by a large degree as to include stocks with a yield up to 7.0%, the additional results are minimal at four new names: Allied Properties REIT (AP.UN), Cenovus (CVE), Dorel (DII.B) and Precision Drilling (PD). Three of the four results are cyclical stocks, all of which have seen 52-week drops of roughly 30%. This of course boosts the yield. While some stocks in our filter have such drops, the trend becomes more common with a higher yield. In general, higher yielding stocks are often a flag for underlying problems and we wanted to focus on sustainable dividends, not risky ones. Overall we did not see much value in expanding the yield threshold.
N
Noel
Jan 5, 2016
Hey folks - This is a useful filter, but why limit it to 4% given that the other screens help determine sustainability? What companies get on the list if you remove the 4% upper limit?