5i Filter - Sustainable Dividend Growth

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. 

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