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High Yield Canadian Stocks: Part 1

Who says you can’t have your cake and eat it to? The adage goes that higher yield = higher risk. To a degree that is quite true. Invest in a company with high debt, a 140% Dividend Payout Ratio, 13% yield and you are looking for trouble. But you can invest in Canadian companies (some well known) with yields of 5% to 10% that have solid balance sheets. Take BCE for example, which has a 5.60% yield and is one of Canada’s leading telecoms and wireless providers.

Canada has many high yield dividend stocks and trusts, many are obviously risky. But some of these companies are gems, which are actually safer to invest in than you might think. If you are a U.S. Investor, Canadian Stocks and trusts offer some high yields that beat American stocks hands down. The income from these investments can even be sheltered in your IRA.

Many of these high yield stocks were originally Income Trusts, and some continue as REITs (Real Estate Investment Trusts). I wrote about the pending income trust conversion in an earlier post. Many of these trusts actually have excellent balance sheets. Of course it goes without saying doing your research and investing with due diligence is always prudent – especially with higher yield stocks.

The Ninja Criteria

In order to maximize yield, while keeping risk manageable, I pre-determined a list of risk criteria for screening. My goal was to filter out stocks that may be in trouble – i.e. high debt etc. Market capitalization was less of an issue for me, since smaller companies generally pay higher yields.

However a company also needs to be able to afford its dividend, as determined by the dividend payout ratio (DPR). A company must also have low debt to operate efficiently. If a company is operating with high debt, and must pay out in dividends more than it collects, then in my opinion that company is not a good investment. Companies that have yields higher than 10% are simply to risky to invest in – usually that high yield is the result of a crashing share price with high debt.

I did not include REITs in this article since that would have required an entirely different analysis. For example, EPS is meaningless for REITs. Distribution / AFFO (adj funds from operations) is the correct way to analyze this sector (as pointed out by a reader).

I think these basic criteria help to create a good filter, though further research is always prudent and necessary:

  • Dividend Yield between 5% and 10%
  • A Dividend Payout Ratio (DPR) under 75%
  • A Liabilities-to-Equity ratio below 1.5
  • A Price-to-Earnings (PE) ratio below 15


The High Yield List

Here are the Canadian High Yield Stocks that matched my filter, sorted by dividend yield:

Company Symbol Price Div Yield% PE Ratio LE Ratio DPR Ratio
Chorus Aviation Inc. ** CHR.A 5.35 11.3 5.21 0.40 58.2
FP Newspapers Inc. ** FP 5.72 10.3 5.5 0.03 57.6
Coast Wholesale Applicance CWA 4.45 9.4 7.95 1.23 75.0
SIR Royalty Income Fund SRV.UN 10.96 9.1 8.00 0.01 72.9
Gamehost Inc. GH 11.10 8.0 5.14 1.05 40.7
Canfor Pulp Products CFX 18.73 7.5 7.35 0.24 54.9
The Keg Royalties Income ** KEG.UN 13.24 7.3 10.68 0.15 77.4
Oil Sands Sector Fund OSF.UN 7.00 7.2 5.04 0.02 35.9
Boston Pizza Royalties BPF.UN 14.39 7.0 10.35 0.03 72.6
COMPASS Income Fund CMZ.UN 12.76 6.7 6.22 0.10 40.9
Brompton Adv. Oil & Gas AOG.UN 5.92 6.6 3.22 0.51 21.1
Core Canadian Dividend Trust CDD.UN 7.30 6.6 5.03 0.27 33.1
Rogers Sugar RSI 5.35 6.4 8.49 1.08 53.9
Cdn. Resources Income Trust RTU.UN 13.48 6.4 3.85 0.02 24.5
Le Chateau CTU.A 11.55 6.1 9.55 0.45 57.8
Canadian Helicopters Group CHL.A 18.50 6.0 8.64 0.31 51.4
DirectCash Payments Inc. DCI 23.00 6.0 11.79 0.95 70.7
BCE Inc. BCE 35.24 5.6 12.36 1.28 69.1
Energy Income Fund ENI.UN 6.47 5.6 3.19 0.01 17.7
Becker Milk Company BEK.B 10.70 5.6 10.39 0.01 58.2
Calian Technologies CTY 18.40 5.5 10.70 0.41 58.1
Averages 7.2 7.55 0.41 52.5

** These stocks have a value that exceeds the filters. They are included in the list with a note of added risk, with either a higher yield or higher dividend payout ratio.


The High Yield Top Picks

BCE Inc.

BCE Inc. (BCE)

BCE otherwise known as Bell, is one of Canada’s leading telecoms and wireless providers. BCE has a market cap of 26.7 billion, low debt, and a reasonable dividend payout ratio. More importantly BCE has a rich dividend yield of 5.6%. BCE has also been very successful this year, taking the lead over Shaw and Rogers in customer satisfaction. BCE recently purchased CTV, the Canadian Television Network, and incurred little debt.

Rogers Sugar Inc. (RSI)

Rogers Sugar is another solid high yield company, with a generous dividend of 6.4%, a low PE ratio of 8.48, and a low debt ratio. Rogers Sugar is a household name that has been well established in Canadian history, since B.C. Sugar was incorporated March 26, 1890. Lantic Sugar Limited and Rogers Sugar Ltd. merged into a new operating entity now known as Lantic Inc., on June 30, 2008. On January 1, 2011, Rogers Sugar Income Fund converted into a conventional corporation under the name of Rogers Sugar Inc.  With that established history, and annual sales of nearly 615 Million – Rogers Sugar is a solid investment for the generous 6.4% yield. It’s definitely on the Dividend Ninja shopping list!

The Keg Royalties Income Fund (KEG.UN)

Keg Restaurants is another of my favourites, after all I have been going to the Keg since I was a teenager! However the Keg Royalties Income fund, should not be confused with the Keg. The Keg Royalty Income Fund (KEG.UN) is an unincorporated open-ended, limited purpose trust which licenses Keg Restaurants Ltd. It has rights to use the Keg name, and in return receives a royalty of 4% of system sales of Keg restaurants. That structure may seem somewhat convoluted, but KEG.UN has over 140 million in assets, with a nice 7.3% dividend yield. The company also has virtually no debt with a very low liabilities to equity ratio of 0.15, and a reasonable PE ratio of 10.68.

Coast Wholesale Appliances (CWA)

With more risk, but also a much higher yield at 9.4%, is Coast Wholesale Applicances. Located in Vancouver, with a market cap of only 29 million, CWA is a supplier of major household appliances to developers and the general public. My partner and I are familiar with the company since we were originally referred to them by our contractor. We were originally going to purchase our appliances from them, but we were quickly turned off with the “used car” style of sales and hustle. For that reason alone, we cancelled our order and went to Sears – where we received a similar deal but with much better service.

Regardless CWA seems to be popular with local contractors and is a bustling business. Coast Wholesale seems to be well valued with a Price to Book ratio of 0.51. This could be a gem if housing construction and renovations on the west coast continues at its current pace.

In Part 2 I will review more Canadian High Yield Stocks. Have a nice week everyone!

Disclaimer

I currently do not own any of the stocks mentioned. This post is not an endorsement, and should not be taken as financial advice or a buy recommendation on the specific securities mentioned. High dividend yield companies are higher risk investments. Smaller capitalization companies are innately more risky than larger blue-chips. Be prudent and do your research before investing!

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40 Responses to "High Yield Canadian Stocks: Part 1"

  1. Echo says:

    Interesting way to screen dividend stocks. I tend to go for a larger market cap, so BCE fits nicely for me.

    I do love the Keg and Boston Pizza models that take a % of revenue from franchisees regardless of how profitable the individual restaurants are. That pretty much makes them recession proof unless they start closing locations (these particular brands are pretty solid from what I’ve noticed).

  2. Nice take on screening. I am going to adjust mine to take into account the LE Ratio as I did not have it. I don’t think I can pull this number automatically in my spreadsheet though :( I’ll have to do some manual update.

    I have had KEG.UN on my radar for a while now. LIQ is just out of reach with a P/E of 15.43. Otherwise, there is a good number of companies I did not even know.

    Thanks for sharing!

  3. Juicy list – thanks!
    As PIE mentioned, we’re in on LIQ.UN – seems regardless of the times people buy booze.
    Bought Rogers instead of BCE the other day – seemed like a better buy for right now.
    Other than that our dividend payers are all less risky (RY, BMO, MBT, PWF) but since we hold them in our Smith Manoeuvre HELOC we’re ok with that.
    Do appreciate this list tho. Will look at it for our TFSA.

  4. @Echo
    BCE has been on my radar for a long time – it’s a solid, profitable, and well run company ;) I like your take on the franchise revenue model.

    @PIE
    I purchased LIQ a month ago, as one of my core holdings. I think its a solid company as well with a nice dividend.

    @Sustainable PF
    Thanx for posting! We have a few stocks in common: LIQ, Rogers, and the Royal Bank. Just remember higher yield = higher risk. There is always a trade off when you go for higher yields.

    Thanx for the comments everyone :)

  5. Nice screen and post man.

    I need to make a post like this at some point.

    KEG.UN is an interesting one. I do like their food :) Maybe down the line for me on that one, after some bigger players and established payers go into my portfolio, like RCI.B, BRC.UN, SNC and a couple of others.

    I’m mostly into big caps, and even so with your screen, BCE fits nicely into my wheelhouse. BCE is going to make money for years and years.

    I look forward to the sequel!

  6. @MOA, you gotta like BCE :) I’m still trying to figure out why its not in my portfolio.. Great yield and a great company. Duh!

  7. Kanwal Sarai says:

    Great post!

    In regards to your previous post I’d like to add:

    small cap + higher yield = higher risk

    I tend to favour large caps who have a history of decades and decades of dividend payments like KO, JNJ, WMT, BMO, CL…. It would be interesting to see how long the companies on your list have been paying dividends. Even more interesting how many years of consecutive dividend growth.

  8. @Kanwal,

    Thanx for posting. Yes you are exactly right! smaller caps with higher yield = higher risk.

    My point in this article is to present some investing alternatives for those who might like to add SOME risk for a higher yield. Of course you want to have a foundation of good quality dividend paying companies, that raise their dividends year after year. Absolutely! Also remember many of these companies were Income Trusts (before Jan 2011) hence the higher yields.

    I’ll see if I have time to research the dividend history of these companies – that’s a really good point (Part 3?). I know Rogers Sugar for example, has been around a long long time. Thanx for posting!

  9. Sean Conrad says:

    Excellent post!

    Thanks so much for giving me some extra screening criteria to think about, and putting a few new companies on my list.

    I need to follow this one up and add if they are option-able or not and a liquidity check on the options.

  10. @Sean
    Ur welcome ;) And of course you can adjust the screening to fit your own needs. As pointed out in the post and comments: higher yield = higher risk. Thanx for posting! :)

  11. Great post!

    I have BCE and KEG.UN

    I used to have LIQ.UN then sold it, and used to have OSF.UN and CFX and sold them.

    I can’t believe Canfor is so high now (I sold it and forgot about it).

    I think I bought it at $6 last year. Whoops!

    I went to Coast wholesale appliances earlier this year too, but was turned off by their salesman-like attitude. we went with Sears as well.

  12. @youngandthrifty
    Thanx for posting! Looks like we live in the same town and shop at the same stores LOL :) But I will draw the line at clothes. If Coast Wholesale wants to remain competitive, then they should lose the “commission sales” persona, they are obviously losing customers.

    Regarding UR other stocks, just goes to show you buy-and-hold wins the day. I also sold a couple of winners recently. Although I made a good profit, I would have made more by holding.

    Cheers

  13. Bernie says:

    Nice screening although your list should include Pizza Pizza PZA.UN.

  14. @Bernie,
    Thanx for posting! You could include PZA.UN in the list. I ommitted this company as it’s dividend payout ratio (DPR) is 78.6%
    Cheers!

  15. Disco Stu says:

    Good post. Also went to CWA to buy a complete set of new appliances. Got a different experience with a saleswoman who made us feel she didn’t have time for us and only interested in selling higher end items. Example, she showed us Jenn Air fridges and didn’t really want to show us the cheaper brands. We left and went to Trail Appliance where the salesman told us Jenn Air was owned by Whirlpool and gave us a list of all the other ones they own. Said the fridges were basically all the same and made by Amana (also owned by Whirlpool) with just the finishing touches the only difference. We got everything we wanted there and were happy with the service. We did go to Sears too but they didn’t carry some of the items we wanted. Our best high yield performer has been WTE.UN

  16. dipen says:

    Thanx for the list!!
    I have owned couple of canadian dividend stocks in my drip plan.

    CML
    SRV.UN
    BPF.UN
    SPB
    STB
    CSH.UN

    All provide juicy dividends, my stocks have grown quite a lot over a short period of time.

  17. @dipen
    Thanx for posting! Yes you do have nice dividend payers in there, these would have serverd you well over the last couple of years :)Congrats on those juicy dividends!

    Have you considered taking profits now on your winners? Most of these are high risk stocks, so they do have the potential to go either way. SPB is dangerous – tread carefully.

  18. @Disco Stu
    Thanx for posting man, sorry for the late response :) Yah CWA has some issues in their customer service, that is for sure!

    Good choice on Westshore Terminals. Though it did not fit my screening – pays more in dividends than it earns, and higher PE ratio. Cheers!

  19. NIRMAL says:

    What is your opinion for YLO.TO?
    Is it next Nortel or will it survive
    and so a good RISK/REWARD BUY?
    Thanks

  20. Nirmal, if you have money to throw away and enjoy gambling, then YLO is for you.

    I honestly do not see any fundamental reason to buy a stock with an excessive dividend yield, crashing share price, and no vision for their business. Time is running out for this company.

  21. I agree with Ninja! YLO is going through a re-branding and changing their business. It may take a few years to see the benefits of such changes IF they succeed. I don’t look at this company as a dividend stock anymore. The core business is changing.

    Even if they have cash, they’ll probably end up using it to buy assets that fit in their transformation.

  22. NIRMAL says:

    Your opinion please for these High Div Stocks
    -CWA
    -GII.UN
    -LBS
    -CHR.B
    Thanks

  23. Nirmal,

    I do not offer financial advice, or recommendations on individual securities – whether for free or paid. But you have to keep in mind with high yield comes high risk. Therefore keep your higher yield and riskier stocks to a minimum ;)

    Cheers

  24. CK says:

    I hold DR, have always believed in Healthcare stocks. Consistent payout for many, many years, throgh thick and thin. Why wasn’t this included ?

  25. CK, what is DR? If it’s a REIT, I didn’t analyze REITs in this post as mentioned.

    Cheers

  26. CK says:

    Thank you, DN.

    DR is Medical Facilities Corporation (MFC), and was used to be called DR.UN, a former income trust issuing IPSs – Income Participating securities, before it converted into a normal corporate.

    MFC owns 51%+ interest in four specialty surgical hospitals, located in South Dakota and Oklahoma, as well as 51% in an ambulatory surgery center in California. It has been giving-out a monthly income of $0.0917 since may 2004 without fail.

    http://www.medicalfacilitiescorp.ca/

    I just loved the consistency.

  27. NIRMAL says:

    CK
    Ijust noticed that DR.TO has an EPS=-0.52.
    How can it pay out $1.10 pa. dividnd consistently as you say.
    Can you please explain that?

    • Nirmal,

      That is exactly the right question to be asking :) If a company pays out more than it earns, there are only a few ways it can get the money to keep paying dividends. (1) Take money out of its cash and operating captial, (2) Issue more shares or debentures to raise the capital (piling on more debt) or (3) sell assets (like YLO did with AutoTrader). Either way you are right to assume caution when the company is paying out more in dividends that it earns.

      Cheers

  28. Bob says:

    I am a newbie. How do you calculate your LE ratio. Is this not the debt-equity ratio which is usually a percentage. Does this mean your 1.5 ratio max is actually 150%? Thank you

  29. Hello Bob,

    That’s a good question. Most financial accounting, and most financial websites for that matter use the debt to equity ratio, as you indicate. You can get the formula for that here:

    http://www.investopedia.com/university/ratios/debt/ratio3.asp

    Now the Globe and Mail website uses a different value, which is what I used in the article. It is called the liabilities to equity ratio. This is different than the debt to equity ratio. It’s a rather complicated number off the balance sheets, but is the total liabilities (not equity) divided by Total Shareholders’ equity. It simply means the liabilities are x times as great as the shareholders equity. It’s only a relaitive figure when compared to other companies.

    I don’t know why the G&M uses this value,but its helpful for these small-cap stocks, especially since the figures are unreported for many of these companies on the larger financial sites.

    Hope that helps! :)

  30. CK says:

    Hi Ninja, I was enjoying looking through your list above and going through some independant sites. I came across the report for 1Q 2011 for KEG.UN in the link below :-

    http://www.stockhouse.com/Bullboards/MessageDetail.aspx?p=0&m=29856830&l=0&r=0&s=KEG.UN&t=LIST

    Under the Financial Highlights section, I saw that for :-

    Jan.1 to Mar.31, 2010 :-

    The Distributable Cash available was $0.350 AND the actual Distribution paid to each Unitholder was ONLY $0.320. So, the DPR here for this quarter last year was : 91.43%

    And for Jan.1 to Mar.31, 2011 :-

    The Distributable Cash available was $0.263 BUT the actual Distribution paid to each Unitholder was $0.267. Hence, the DPR here for this quarter this year was : 101.6%

    1) Am I right is saying the quarterly DPR for Q1 this year has exceeded last year’s Q1 ?

    2) I am not even comfortable with last year’s DPR. How were you able to compute that the DPR is 77.4% as in Table 1 above ?

    Did I miss something ? Thanks….

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