This post follows an inspiration I got from reading Dividend Diplomats’ post on Top 5 Foundation Dividend Stocks for a Portfolio. In their post, the Diplomats recommend five stocks that beginner investors can use as foundations of a long term portfolio. The post discusses various stages in the process to whittle down the selection and eventually settles on five companies – McDonalds (MCD), Procter & Gamble (PG), Johnson & Johnson (JNJ), Consolidated Edison (ED), and AT&T (T). These are all fantastic choices and I own shares in two of those companies (JNJ and T), and agree that these companies provide any beginner with a great foundation for dividend investing. In this article, I want to focus on Top 5 Canadian Foundation Stocks.
“Why?“, you may ask. If a beginner wants to invest in great companies, whats wrong with the stocks discussed above. Well, short answer is – nothing really. However, an investor may have plenty of reasons for picking Canadian stocks. For starters, a Canadian investor may be looking to build a portfolio in his/her Tax Free Savings Account or non-registered account, which provides better tax incentives for Canadian companies; or simply looking for familiarity of the companies (people like to invest in companies that they are familiar with, as they potentially understand how the business works, and feel more comfortable investing in them). An international investor could simply be looking for blue chip names in the Canadian market to gain some exposure. For this reason, I have put together my picks for the top Canadian stocks with dividends. Note that these are simply my picks, and each investor may lean one way or another and go with different companies. Please perform your own analysis and consult with your financial advisor before investing in any of the stocks mentioned here.
Canadian Foundation Stocks
To pick the top five Canadian foundation stocks, we need a selection criteria. I have chosen four such topics to judge the companies. They are dividends, fundamentals, qualitative aspects, and diversification.
Acknowledgement: Before we begin, I’d like to thank Michael Weber for maintaining the Canadian Dividend All Star List, which can be found here. A lot of the data presented here comes from the aforementioned list.
Step 1: Dividends
The company must pay dividends. Dividend payers and growers are usually blue chip companies that have a track record of good business practices and reaffirms an investor’s faith in the management and company. Owning dividend paying companies provides investors with reasons to hold the investment for a long duration, provides passive income, stability, feedback and inflation protection. I have written in the past for the reasons to own dividend stocks.
Step 2: Fundamentals
The company needs to have solid fundamentals. From time to time, some fundamentals may gyrate depending on the broad economic conditions, but over time, the company must bring things back to balance – such as reducing debt, maintaining a healthy balance sheet, an increasing book value, growing earnings etc.
Step 3: Qualitative aspects
The company must have a track record of being a leader in the industry. Is the company held in high regards from its peers and insiders? Does the company hold competitive advantage over others? As mentioned in the previous point, solid fundamentals are necessary for a company to grow and continue operating in a profitable manner. Some factors may be out of control of the company itself, such as the actual price of the stock because investors are willing to pay the premium to own quality names. As such, metrics such as P/E, P/B, P/S etc may seem high, but that is simply the nature of quality companies.
Step 4: Diversification
One of the most important factors to protect an investor’s portfolio is diversification. The companies selected here are chosen from different sectors of the economy with diversification in mind. This does not mean that a company’s direct competitor in the same sector is necessarily a bad investment (for e.g., if we look at the financial sector, an investment in Royal Bank of Canada (RY) is just as good as investing in Toronto-Dominion Bank (TD)). The five stocks chosen here are from – Energy, Financials, Industrials, Telecommunications, and Utilities.
With those four selection criteria in mind, here are my top 5 Canadian foundation stocks.
- Enbridge Inc (ENB) – Enbridge Inc provides energy transportation, distribution, and related services in North America and internationally. The company operates crude oil and liquids pipeline system, is involved in international energy projects, and is involved in natural gas transmission and midstream businesses. The company was founded in 1949 and has been paying dividends since 1953. The company has a record of raising dividends for 19 consecutive years and has a 5-yr DGR of 13.6%.
- Royal Bank of Canada (RY) – Royal Bank of Canada is the largest financial institution in Canada, as measured by deposits, revenues and market cap. The bank has operations in 52 countries including a strong presence in the Caribbean. The company was founded in 1864 and has paid dividends since 1870. The company has a 4 year record of growing dividends and has a 5-yr DGR of 7.3%. Read more about RY here.
- Canadian National Railway (CNR.TO) (CNI) – Canadian National is the larger of the two railroad companies in Canada and second largest railroad company in N.America. The company serves three coasts of N.America with over 20,000 miles of tracks. The company was founded in 1922 and has been paying dividends since 1996; the company has a 19 year track record of raising dividends and has a 5-yr DGR of 14.6%. Read more about CN here.
- BCE Inc (BCE) – BCE Inc is Canada’s largest communications company providing communication solutions to residential, business and wholesale customers under the Bell Canada and Bell Aliant brands. The company operates in four segments – Bell Wireline, Bell Wireless, Bell Media, and Bell Aliant. The company was founded in 1880 and has been paying dividends since 1949; the company has been growing dividends for six years with a 5-yr dividend growth rate (DGR) of 9.3%. Read more about BCE Inc here.
- Fortis Inc (FTS.TO) – Fortis Inc is an electric and natural gas distribution utility company. The company operates in Canada, United States, Central America, and the Caribbean. The company was founded in 1977 and has been paying dividends since 1972. The company has a track record of raising dividends for 41 consecutive years and has a 5-yr DGR of 4.2%.
Those five companies, in my mind will provide with a great foundation, not only for investors starting out but also seasoned investors who wish to add more to their core positions. Again, I’d like to remind the readers that these are simply my picks and you, as an investor, may decide to pick one of the peers instead of the companies mentioned here. Please do your own due diligence before investing in any company. Having said that, what do you think of the picks mentioned here? Do you agree with my picks or would you pick some other company? One way or another – why? Please share your thoughts below.
Full Disclosure: Long BCE, CNR.TO, JNJ, T. My full list of holdings is available here.
Photo Credit: freedigitalphotos.net/zdiviv