Canada’s best dividends 2022: How we chose the winners

by Ann deBruyn

Couple discussing investments over their tablet

Choosing Canada’s Best Dividend Stocks for 2022

Grades

The Dividend All-Stars grades all of the dividend-paying stocks on the SP/TSX Composite. By limiting our focus to this select group, we recognize that we may not capture some great Canadian companies, but we want to ensure we’re targeting the large liquid stocks. A company has to possess three important characteristics to make the cut: It has to offer an attractive yield, appear well positioned to sustain a steady flow of income to investors and be reasonably priced.

With three simple ingredients, the process sounds simple, but there is a lot of data to digest. We put in the elbow grease by collecting and parsing all the data and condensing it down into a simple letter-grade system to help you assess each stock’s investment potential.

Our top stocks earn A-grades, but there are often also some Bs that are worth further scrutiny. Companies with C ratings are missing one or more of the ingredients we look for. Companies we feel investors may not want to target for their dividends earn Ds or, in some cases, Fs if they have a weak outlook. 

Before you turn to your discount brokerage to buy these stocks, remember the Dividend All-Stars list is a purely quantitative analysis based on data collected from Bloomberg and Morningstar. To ensure broad representation, companies that may not have data for a specific field are still included, but those companies earn no points for that category. 

Notably, the ranking doesn’t consider the talent in the executive suite or how economic pressures could weigh on a company’s earnings. 

Here’s the complete breakdown:

Yield

Companies sporting attractive yields and a history of growing their dividends over the past five years earn top marks. This two-pronged approach seeks to identify companies that not only offer attractive yields, but are also well positioned to grow their payouts over time. This accounts for 40% of the overall score. 

Stability

Sky-high dividend yields are meaningless if the company can’t afford to maintain them. To try and avoid this risk, we target companies we think will be able to sustain their dividends. For this part of the score, we  want to identify companies with the means to continue their dividends even if they hit minor setbacks. 

To accomplish this, we’re screening for profitable companies that are earning more than they pay out, are growing earnings and are not weighed down by debt relative to their peers. This accounts for another 40% of our final score.  

Value

As an investor, it’s not enough that a company can simply afford its dividend. Before you commit to a stock, we also think you want to know whether it’s attractively priced. The final 20% of our grade goes to value. We reward companies that have low price-to-book and price-to-earnings ratios. 

The P/B ratio measures how much cash a company might be able to raise if it were to sell off all of its assets and pay off its debts. The lower the P/B, the better. Similarly, the price-to-earnings ratio allows us to identify profitable stocks that are trading at a reasonable price.

When you combine all these ingredients, you get the largest 100 Dividend All-Stars in Canada.