While we strive to make our platform the number one resource for income investors when it comes to researching stocks, we do realize that people are going to venture out and explore other tools.
One of the more popular research tools for income investors are both the Dividend All Star List and Aristocrat Lists. These lists summarize the dividend growth streaks and growth rates of some of the best companies in Canada.
Today, we wanted to discuss the various methodologies of dividend growth stocks, so that investors can understand and utilize these lists better.
Of note, an alternative measure is to utilize our stock screener to its fullest capabilities, as it does have the ability to pull up growth streak and growth rate data on over 850 companies here in North America.
If you haven’t had a chance to utilize our screener, I strongly suggest you give it a shot. Here is an introduction video to our screener and how you can use it to identify strong dividend stocks.
Of note, this video, along with multiple others, are available under the “account” dropdown menu.
Many dividend growth lists differ
The accepted definition of a dividend growth stock is a company with a consistent history of annual dividend raises, typically defined as five or more consecutive years.
It is a simple concept to grasp. However, many reading this today will be surprised to learn that the methodologies of the most popular dividend growth lists differ.
In Canada & the U.S., there are two main lists:
- Canadian Dividend Aristocrats
- Canadian Dividend All Stars
- U.S. Dividend Aristocrats
- David Fish’s U.S. Contenders, Challengers & Champions (CCC) list.
While they are solid resources, they employ different methodologies, so the stocks on each list don’t match. We will focus today’s article on the Canadian lists. Next week, we’ll dive into the ones about U.S. equities.
The Canadian Aristocrats list is based on the S&P/TSX Canadian Dividend Aristocrats Index. Since it is an S&P Dow Jones Index, there is also a corresponding ETF (CDZ.TO) which tracks the movement of the Index.
The All-Star list was inspired by the late Mr. Fish’s U.S. CCC list and is maintained by a Canadian finance blogger – Dividend Growth Investing & Retirement (DGI&R).
There are four very distinct approaches that differ between the two lists. Lets go over them.
Market cap limitations
First, the Aristocrat list has a market cap threshold of $300M. This isn’t necessarily an issue as most small caps have no history of dividend growth, let alone pay dividends.
The reason is simple; small caps are typically in their growth stage. They are best served to re-invest in the business rather than payout out a portion of earnings to shareholders.
From what we can tell, there is no market cap limit on the All-Star list; in fact, there are TSX Venture stocks on the list. There are only two today (NET.UN.V and UFC.V), but there have been many more in the past.
Many lost their status following dividend cuts or periods of dividend stagnation. Still, some have also since graduated to the TSX Index. The point is, the All-Star list doesn’t seem to exclude small caps, which is a bonus.
Record date versus ex-dividend date
Second, the Aristocrat Index typically uses the calendar year and the “ex-dividend” date in its analysis.
As a reminder, the “ex-dividend date is the day on which a stock trades without the benefit of the next scheduled dividend payment. Instead, the dividend is paid to the previous owner.”
This has little impact unless the ex-dividend date occurs in late December and the payment date doesn’t occur until the new year.
In my discussions with the All-Star list founder several years ago, they used calendar year and declaration date, which was a significant difference.
They have since shifted to the Record Date, which is closely aligned to the Aristocrat Index, but not an exact match and as a result, there could be minor differences as a result.
Aristocrats list doesn’t include limited partnerships
Next, we must recognize that the Aristocrat Index excludes limited partnerships. This means that specific securities from the Brookfield suite of companies, BEP.UN, BIP.UN, etc., are omitted.
Yes, that is correct – BEP.UN and BIP.UN are All-Stars but technically not Aristocrats despite 10+ consecutive years of distribution growth.
Trusts such as Real Estate Investment Trusts (REITs) are, but limited partnerships are not. I’d imagine BEPC and BIPC will eventually be added once they have accumulated five years of dividend growth.
The leniency of actual growth streaks
The final, and MOST important for all of you to be mindful of, is what leads to the most differences between the two lists. Here is an excerpt from the Aristocrat Index Methodology document:
“The security increased ordinary cash dividends every year for at least the past five years; however, the security can maintain the same dividend for a maximum of two consecutive years within those five years.”
The second sentence, which enables the company to have a stagnant dividend for two consecutive years, is a significant shift from traditional dividend growth investing, which requires annual raises.
I’d argue that most retail investors who buy CDZ.TO or who acknowledge a company’s Aristocrat status are not even aware of this problematic stipulation – at least in our opinion.
In our opinion, this is a big negative to the Aristocrat list
While there are times when it works out (I’ll speak on a particular situation in a moment), more often than not, a company that holds its dividend steady for two consecutive years should be viewed as a warning sign.
There were many times I’ve come across stocks on the Aristocrat Index that had no business being on the list. Why?
Their periods of dividend stagnation were a direct result of issues with the business, and dividend cuts were inevitable. Off the top of my head, companies like Chorus Entertainment (CJR.B.TO), High Linder Foods (HLF.TO), and Inter Pipeline, which used to trade under the ticker IPL.TO, all overstayed their welcome on the Index before inevitably cutting the dividend.
There is the odd case where it works out, however. Using Canadian Pacific Railway (CP.TO) as an example, it is on the Aristocrat list despite having kept the dividend steady for two years. Is CP at risk of cutting like the others mentioned? No.
However, CP is far from a reliable dividend growth stock and has had multiple periods of dividend stagnation throughout its history, unlike Canadian National Rail (CNR.TO), which hasn’t skipped a beat in raising the dividend for 27 consecutive years.
This is not to say CP is a lousy stock. Quite the contrary – we like it a lot. However, should it be considered an Aristocrat? Does it deserve the same level of distinction as those who never miss? We’d argue – no.
A time when Aristocrat leniency has worked out
The only time I’ve seen this methodology work well was when banks were subject to a dividend freeze during the pandemic. Thanks to this 2-year rule, all banks kept their Aristocrat status.
Whereas on the All-Star list, several lost their streak because of the timing of the reinstatement of dividend raises.
Here at Stocktrades, we considered all the streaks intact, and it is reflected as such in our screeners. The decision to raise was taken out of their control, and we used our judgment to override strict rules.
Our screener uses a blend of both of these lists for optimal accuracy
As you can see, the two lists have some significant differences. It is why the dividend growth streaks on our screener are a hybrid of the All-Star and Aristocrat lists. While we prefer DGI&R’s All-Stars list over the Aristocrats, it is worth noting that historically, there have been some glaring omissions.
Case in point, the All-Star list was missing Toromont (TIH.TO) for the longest time. It took me multiple emails, comments on their articles, etc., to get them to recognize TIH as having the third-longest streak in the country. I have since noticed several other tickers that were missing for long periods of time.
Today, we fix the streaks ourselves as we have our own dataset that supports the screeners. Case in point, BRP Inc (DOO.TO) has a two-year dividend growth streak, and yet, the company is not listed on the All-Star list’s “Other” tab – which is where they keep those with streaks of less than five years.
This is not to say the All-Star list is poor
Quite the contrary – it is the best free resource available to Canadian dividend growth investors, and I’ve leveraged that list for many years. In fact, outside of our screeners, which we feel is one of the best tools in the country to find strong income stocks, we advocate that retail investors use the All-Star list instead of the Aristocrat list.
To conclude, it is vital to recognize the distinction between All-Stars and Aristocrats and how the various methodologies can impact the stocks on the list. Next week, we’ll go a little more in-depth about the U.S. versions of the lists, which are again different from each other and the Canadian lists.
