Top 5 Canadian Foundation Stocks

CanadaThis 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.

  1. 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%.
  2. 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.
  3. 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.
  4. 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.
  5. 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

22 thoughts on “Top 5 Canadian Foundation Stocks

  1. R2R,

    Thanks for bringing these companies to my attention. I haven’t look too closely at Canadian companies, however I did buy some shares of TD in January. I also have not added a rail company yet, but would like to. The dividend track record of CNI looks impressive.

    MDP

    • MDP.
      TD is a great company to own and its really hard to pick one Canadian bank against the other. I am considering adding TD to my portfolio as well.
      Rail companies are great for exposure to the health of the overall economy. CNR is the only railroad I own, and I love the fact that they service three coasts – Atlantic, Pacific and Gulf. None of the other railroads have the breadth of such rail network. In the US companies, I like UNP and NSC – and will have to re-evaluate between those two when the time comes for me to add a second railroad.
      Glad you like the article. Thanks for stopping by
      R2R

  2. I’m surprised MCD and T made the cut for 5 essential American stocks… MCD has rough times ahead and I don’t have enough faith in fast food to weather a health-conscious, organic, gluten-free, whatever cultural diet. I used to own T but the payout ratio is too high and SO MUCH DEBT so I sold awhile ago (maybe things have changed, but not my cup of tea)

    Your Canadian picks are good but very easy to grab in a Canadian dividend payers ETF 😉

    • Bridget,
      Yes, MCD is facing some issues currently – but as a long term investment, it might still be a good pick. I dont own it myself, but I can see why investors like it. I own T though,…they have a slower growth, but I think they are in for some great road ahead – with growth via acquisition in DirecTV and international expansion in Mexico. What doesnt get a lot of coverage, and which I am the most bullish about, is the growth in subscribers for the car connectivity. They have completely cornered the market with almost every major car manufacturer to exclusive deals and the growth is already starting to see a slow manifestation in their earnings report. As the technology develops and people move to smarter cars over the years, that revenue growth will increase. Yes, they have debt, but I think they are leveraging debt in a good way – buying up the spectrum by outbidding competitors like VZ.

      Agreed that one can get the exposure to the Canadian stocks mentioned here via ETFs. Theses companies are the bread the butter of almost every Canadian index ETF and that should be indicative of the quality of the companies.

      Thanks for stopping by and sharing
      R2R

  3. Jane says:

    Although I’m only just over a year into dividend investing it sure is great to read down your list and note that I chose three of the same as my core (ENB, RY, BCE). I’m looking to add more to BCE and had already been actively watching CNR. Looks like I may want to look further into Fortis as well. Thanks for your thoughts! I really appreciate finding fellow Canuck dividend investors for their perspective.

    • Jane,
      I think you have a solid start by picking ENB, RY and BCE. I own BCE and CNR from that list and while I think RY is also a great company, I just own BNS for now – one of the reasons why I like BNS instead is due to their geographical diversification. This may not be what most of the other investors are looking for, so I picked RY instead. I would love to add RY to my portfoli as well – maybe sometime in the future.
      CNR is a fantastic company and I started investing in them last fall and picked up some more shares last month. About utilities, its slim pickings as the valuations arent that great. Even FTS has a really high payout ratio, so Im not crazy about it. But it has a great dividend growth record that is not matched by others. Hope that helps. Feel free to drop by and question/comment away anytime.

      R2R

      • Jane says:

        Thanks R2R I appreciate it – I really enjoy perspective from fellow Canucks. I actually own BNS as well as I thought they would be better protected should a housing crisis actually happen due to their better geographical diversification. I felt better about going for a double bank strategy. 🙂

        In terms of electric I had been considering Emera but haven’t had a chance yet to really take a look at the industry full force. I started my portfolio with the typical Canadian stalwarts of banks, comm, and oil & gas first! (I consider Enb to be oil & gas but with less of a commodity swing with it being a step away as a pipeline company…I’m also totally biased as my hubby works for them so wasn’t allowed considering anything else 😉 )

        • Excellent choice with the BNS investment, Jane.
          I am not familiar with Emera’s financials although I do see its name pop up every now and then. Your initial picks of going with banks, comms and oil&gas are all good. Diversification is a key factor when it comes to investing and its good spread your nest egg around in different asset classes and different sectors when it comes to stocks. I hear ya on not being able to or willing to invest in a particular company. Best wishes with your explorations and investing.

          R2R

  4. Soheil says:

    I’m looking at ENB’s fundamentals and the balance sheet is not looking that great to me.

    Debt/Equity ~ 1.70 and their ROE is not that great
    Payout Ratio 152%
    Issuing shares consistently in the past 10 years
    Current Ratio and FCF are nothing to brag about either.

    The only interesting thing about them is their revenue growth and DGR (which I’m not too keen of given the payout ratio) . What am I missing here?

    Source: morningstar.ca / RBC DI

    • Soheil,
      You raise some really good and valid points. Pipelines are bit more tricky to evaluate and invest in as you cant judge them based on the traditional metrics such as PE and payout ratios. I think they are closer to something like REITs when you look at other metrics to evaluate. You are right – that the payout ratio seems high with > 100% and that is simply the nature of the industry as it is capital intensive. FCF is probably a better measure, although the current performance numbers dont look so great for ENB. But over the long term, the company has done great and will continue to do great. One simply needs to look at the reach of their pipeline network (http://www.cepa.com/library/maps) and even though they’ve been issuing more shares to raise money, their book value has continued to grow over the years.

      Like you said, revenue growth and DGR for ENB are great and I think teh dividend growth will continue over the years even though it probably appears like they cant with the high payout ratio.
      Hope that helps
      R2R

  5. Great list. Between BCE and Rogers I would probably go with Rogers though. Good to know that we own all 5 of these Canadian dividend stocks in our portfolio. 😀

    • Interesting pick, Tawcan. I owned RCI for a year and decided to call it quits on it as I thought my money was better invested elsewhere. I think over the long run, it wouldnt have mattered, but the room for error at where I bought it was low, so I figured I’ll take my money elsewhere for now and re-evaluate and possibly invest in RCI later.

      Im not surprised you own all 5. You have a great portfolio with some stalwart names.
      Best wishes
      R2R

  6. R2R,
    Great list you got there, too bad I’m a resident of US as I am kinda hesitant on investing on foreign stocks to avoid foreign tax as much as possible (unless I see an irresistible value and entry yield), right now Im liking RY.
    Thanks for sharing!
    FFF

    • FFF,
      I hear you on the international exposure and the foreign tax. But if you buy the US-listed equity, isnt that treated as a US-holding – if you hold in an appropriate tax-sheltered account, that is.
      RY is looking good indeed. Lots of talk about the CNY purchase – which some are suggesting that they overpaid, but maybe they saw enough value in it.

      cheers
      R2R

  7. R2R,

    Seems like a solid list of Canadian stocks to me. I could see myself adding CNI to my TD and BNS holdings at some point. Love the railroads. Like Monopoly, I’d love to own them all. 🙂

    Best regards.

    • Hey DM,
      Looks like we are fellow bank shareholder buddies 🙂 I just initiated a position in TD and now my two Canadian banks are TD and BNS. CNI is a great company and holds a lot of competitive advantages over the other companies. I like you stake in NSC as well – and would love to add that to my portfolio. Gotta own them all 🙂

      Thanks for stopping by and sharing your thoughts
      R2R

  8. Hi R2R, the only stock that I don’t hold on your list is Enbridge. I have been keeping an eye on it to wait for a dip to an attractive price but it is going strong!

    Also, when you mean foundation stocks do you mean that they hold the majority of your portfolio?

    • Looks like you have a solid portfolio, Jeff. ENB does keep climbing, esp after the last massive dividend increase announcement.

      No, I dont mean that majority of the holdings should be in just these 5 stocks. I mean it as a core holding around which others can be added. Some companies have a wide-economic moat, but some simply due to the nature of the industry, cant have that. Nevertheless, the companies addressed should be able to withstand recessions and other economic headwinds, thus giving a good starting point for starters in individual stock investing or fortifying the core positions for seasoned investors.

      Hope that helps
      R2R

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