Thursday, September 27, 2007

'True Yield' of Dividend Paying Stocks

Financial Post, David Berman, 27 September 2007

Any investor who chases after dividend-paying stocks knows yield is only part of the attraction. A low payout ratio is also good, not to mention the ability to raise a dividend over time.

George Vasic, strategist at UBS, revisited his regular look at Canadian dividend-paying stocks recently, fine-tuning a stock screen to select the best of the best.

Using his approach, the best dividend-paying stocks have yields above 1.5%, a "true yield" (that is, taking into account share buybacks) above 3%, no share dilution over the past three years and five consecutive dividend increases above 10%. Finally, these stocks should have a payout ratio that is below 50%.

What stocks make the grade? There are just nine of them: Methanex Corp., National Bank, Canadian National Railway Co., Manulife Financial Corp., CIBC, Bank of Montreal, Bank of Nova Scotia, Sun Life Financial Inc. and Royal Bank of Canada.

Yes, the list includes a lot of banks and insurance companies. "The bottom line is that when share count is included, the large cap financials look even better than their already attractive dividend yield would suggest," Mr. Vasic said in a note to clients.