When investors think of blue chip Canadian stocks, they often think of some of the best Canadian dividend stocks. However, this isn't necessarily the case.
What are Canadian blue chip stocks?
Our definition of a blue chip stock is simply one that has a large market capitalization and is a top company in its industry.
Typically I look for high quality stocks that are within the top three in terms of performance in the sector, but industries like the Canadian banking industry can have a multitude of stocks I consider blue chip even if they aren't a front runner.
Blue chip stocks are often the backbone of an investors portfolio, and are held for the long term. Investors, especially those just learning how to buy stocks in Canada, should make high quality blue-chip stocks their primary focus.
They provide long term stability and usually (but not always like I stated above) an excellent dividend.
Why is that?
Well, a "blue-chip" stock is often well established and has been financially sound for decades. This differs from growth stocks, as an investment in them is often banking on the growth potential of the company, not its previous results and can have extensive swings in price over the long term.
An interesting piece of information before we move on to the best blue chips stocks in Canada though.
Did you know that the term blue chip, when it comes to the stock market, is derived from the game of poker?
Typically, blue chips held the highest value, and as such were the most important to hold in your stack.
With all that said, here is a list of high quality Canadian blue chip stocks you need to be looking at in 2021.
The list is dominated by energy, financial and railroad companies, but this is to be expected as they take up a large majority of the TSX.
What are the best Canadian blue chip stocks?
10. Barrick Gold (TSX:ABX)
After a bear market that lasted the better part of the last decade, gold has finally regained its shine.
During the last bull market, gold companies were irresponsible and scooped up assets at high prices. This led to record-high debt loads, and once the price of gold crashed, they were ill prepared.
This was a factor in a number of defaults, write-downs, and dividend cuts.
Fast forward to today, gold producers are much better prepared. They are leaner and are taking a much more disciplined approach to capital investments. This bodes well for the long-term future of gold stocks regardless of the volatile price of gold.
Barrick (TSX:ABX) is one of the biggest gold stocks in the world, and it has emerged stronger than ever. It is one of the most diversified stocks in the industry and generates considerable cash flow.
Based out of Toronto, Barrick is one of the world's largest producers, with 2020 production coming in a nearly 4.8 million ounces of gold, and 460 million pounds of copper. The company also has nearly 68 million ounces of gold reserves and is well positioned to grow its production profile over the next decade.
Furthermore, it has been laser-focused on reducing its debt burden recently – down by more than 50% over the past handful of years.
The company is making decisions based on $1,200 gold prices, which should insure strong cash flow generation while providing a large margin of safety. It has also returned to dividend growth, a strong sign of confidence by management that the worst is behind them.
All in sustaining costs hover around the $1,000 an ounce level and it is among the best valued in the industry.
There are plenty of other gold companies on the TSX Index, but when we're looking at blue chip options here in Canada, none of them compare to Barrick in terms of size and stability.
However, the company has significantly underperformed the TSX Index over the last decade, and as a result it's number ten on this list.
10 year dividend adjusted return of ABX vs the TSX:
9. TC Energy (TSX:TRP)
The oil & gas industry was decimated in 2020. However, we're slowly seeing it recover and Canadian investors are looking for blue-chip stocks to gain exposure. And, you may be wise to avoid producers and stick to pipelines. Why?
Whether it be TC Energy (TSX:TRP), Pembina Pipelines, or Enbridge (TSX:ENB), these are companies that transport various commodities. They are less susceptible to damage due to fluctuations in the price of oil.
One of the best in the industry is TC Energy (formerly TransCanada). The company was the best performing pipeline by quite a wide distance in 2020 up until the end of the year, when the rumored and eventual confirmation of the cancellation of the Keystone XL.
However, the company has plenty of growth projects, and we don't view the cancellation as an issue at all.
In terms of the pandemic, TC Energy didn't face any significant impacts. In fact, TC Energy said:
“despite the challenges brought about by COVID-19, our assets have been largely unimpacted”
It went on to say that its outlook remained unchanged as 95% of EBITDA is underpinned by regulated assets and/or long-term contracts. This was a very strong indicator of the company's financial health.
The company has critical infrastructure across North America and it expects to spend $37 billion on growth projects through 2023. The majority of which will be spent on natural gas pipelines.
Further highlighting its resilience, the company re-iterated dividend growth guidance of 8-10% annually through 2021. Post 2021, it expects the dividend to grow at a compound annual growth rate of 6% at the mid-range.
If you are looking for a best-in-class energy company, TC Energy certainly fits the bill. It is trading at cheap valuations, the company’s juicy 5.64% dividend yield is well covered, and it has a robust pipeline of growth projects.
10 year dividend adjusted return of TRP vs the TSX:
8. Canadian Pacific Railroad (TSX:CP)
Railroads are the bellwether for economic activity, and Canadian Pacific Railway (TSX:CP) has made a dramatic move forward.
Pre-2012, the company was having significant operational issues which led to many tough decisions. The turnaround has been nothing short of astounding. Over the past five years, it has outperformed its larger peer (CN Rail) and it transformed itself from the lowest-margin railroad, to the highest of all publicly listed North American railroads.
With its operational issues in the rear-view mirror, the railroad has returned to dividend growth.
In July 2020, the company extended its dividend-growth streak to five years when it raised the dividend by 15%. It was a notable raise as it was declared at a time in which many other companies either cut or suspended dividends as a result of the pandemic.
Over the course of the streak, it has consistently raised the dividend by double-digits.
With July’s raise, CP Rail will once again earn Canadian Dividend Aristocrat status this year. This is important as it will be added to funds that track the Aristocrat Index and it will regain credibility among dividend growth investors.
Over the next handful of years, the expectation is for earnings growth in the high single digits. This growth actually has a chance to accelerate, but the company is currently in a feud with Canadian National Railway over a purchase of Kansas City Southern.
The deal, Had Canadian National not stepped in to interrupt it, would have been comprised of share issues and debt, and would have created a railway that spans from Canada all the way down to Mexico.
There isn’t much not to like about CP Rail. It forms a duopoly with CN Rail, and rail is the primary means of transporting goods across the country. It is also proving to be a strong defensive stock in light of the current pandemic.
10 year dividend adjusted return of CP vs the TSX:
7. Canadian Apartment Properties REIT (TSX:CAR.UN)
You might be thinking, how can a REIT make a list of blue Chip stocks in light of the current pandemic? Let us explain.
Although the sector as a whole is under pressure, there are certain industries that are more stable than others – that includes those that operate multi-unit residential properties.
Although there are better performing names in this area, Canadian Apartment Properties (CAP) REIT (TSX:CAR.UN) provides excellent value here. It has a suite of affordable rent portfolios that is proving to be quite resilient.
CAP REIT is also in strong financial shape. It has a debt-to-gross book value of only 36% (a rate below 50% is considered strong), one of the lowest in the industry.
Furthermore, the company’s 2.50% dividend yield is well covered, accounting for only 73% of adjusted funds from operations. Once again, this is in the top tier of TSX-listed REITs.
The company is currently trading at a 17% discount to cash flow value, and a 14% discount to net asset value. In June of 2020, the company was added to the S&P/TSX 60 Composite Index which tracks the largest companies by market cap on the TSX Index. In fact, it is the only REIT among the Index constituents.
Although it does carry greater risk than most on this list, the risk-to-reward proposition is attractive. Now is the perfect time to start accumulating Canada’s largest residential REIT.
10 year dividend adjusted return of CAR.UN vs the TSX:
6. BCE Inc (TSX:BCE)
BCE Inc (TSX:BCE) is one of the largest telecom companies in the country and is often grouped together with the "Big 3", being Telus, Rogers, and Bell.
In terms of Blue Chip stocks, you can't really go wrong with any of the three, but what sets BCE apart is its ability to generate new subscribers in a mature market, and its sheer size.
The company's strength is product innovation, and providing the fastest network possible to Canadians. Its success in this department is reflected with a customer base that exceeds 9 million subscribers.
The Canadian telecom industry is somewhat of a regulated monopoly. The three big players dominate the industry and the regulations make this unlikely to change anytime soon.
Canadian's pay some of the highest phone and television bills out of all the developed countries, and strict regulations make it nearly impossible for new players to try and penetrate the market.
The one company that was having some success at breaking through is Shaw Communications (TSX:SJR.B), but they were recently acquired (pending approval) by Rogers.
BCE is one of the best income stocks in the country, with a dividend yield of approximately 5.85% and an 12-year dividend growth streak. Although it may seem like a short streak, the streak was interrupted by an impending purchase by the Ontario Teacher’s plan that ultimately fell through.
With a market capitalization of $54.6 billion, the company is one of the largest in the country and is a Blue Chip stock that has provided consistency and reliability for over a decade.
Although it may not provide the best growth out of the Big 3, it has the widest reach across the country and commands the title of Blue Chip telecom.
10 year dividend adjusted return of BCE vs the TSX:
5. Metro (TSX:MRU)
A quick look over the sectors in 2021 and you will find only one that has consistently been among the top performers – consumer staples.
Not surprisingly, as the economy shut down, we still needed our basic necessities and this sector remained strong, particular among grocery stocks.
One of the country’s best is Metro (TSX:MRU).
A quick look at its long term chart will tell you everything you need to know. Metro is a pillar of consistency. Nothing flashy here, just consistent and reliable growth.
The company’s low yield (1.72%) may be a turn-off for some, but it is one of the best dividend growth stocks in the country.
Metro’s 26-year dividend growth streak is tied for the 7th-longest streak in the country and it is one of the few in the leading 10 to have consistently raised by double-digits over the past three, five, and ten-year periods.
Even in a post-pandemic and post-shutdown environment, we feel that consumer activity and purchasing habits have changed forever.
It's likely that Metro could see less foot traffic through it's doors, but a higher amount of volume per purchase as consumers have learned over the pandemic to shop more efficiently.
Another habit? E-commerce. And this is a space that Metro is growing in rapidly. In fact, the company's online sales saw a 240% increase year over year.
This growth is likely to slow as the pandemic subsides, but there is no question that consumer habits have changed and some will make a permanent shift to e-commerce ordering due to convenience. As a result, we'd still expect significant growth in the company's online sales moving forward.
And finally, in periods of rising inflation, a company like Metro has the chance to outperform. Consumer defensive stocks like Metro tend to outperform pure-growth plays in rising rate & inflationary environments.
10 year dividend adjusted return of MRU vs the TSX:
4. Constellation Software (TSX:CSU)
Although it is starting to make headway, the technology sector is still under-represented on the TSX Index.
Unlike south of the border where tech makes up almost a quarter of the markets, the sector still accounts for only a single digit weighting on the TSX Index.
This is up notably from the 3% it accounted for a couple of years ago, yet there is arguably only one company that could qualify to be a true blue chip Canadian stock.
And that is Constellation Software (TSX:CSU). Constellation is one of the best-managed companies on the TSX Index.
Over the past ten years, its stock price has soared by 2,830% and it has one of the best track records in the industry. It pays a modest dividend, but what it lacks in income, it more than makes up for in capital appreciation.
A $10,000 investment in the company 10-years ago would be worth $292,540 today – and this is without commanding some of the crazy valuations of today’s high-growth tech stocks.
Constellation is simply put, the best consolidator in the industry. It has a knack for acquiring companies and seamlessly bringing them into the fold. It is also important to recognize that tech is becoming a defensive play in this new environment.
The pandemic has accelerated the shift to technology and Constellation has gone up by over 34% in the last year.
It is however, a company that requires full trust in management. It does not hold quarterly conference calls, and only provides an annual letter to shareholders. You are putting your trust in management, and thus far, it has proved to be a winning proposition.
It also has a high share price, frequently trading in the $1700+ range. This does make it extremely hard for beginner investors with a small portfolio to purchase the stock. If you only have $5,000 or $10,000 to start out with, it presents somewhat of a concentration risk.
Fractional shares, or a potential share split, could make Constellation more attractive to those just starting out.
10 year dividend adjusted return of CSU vs the TSX:
3. Canadian National Railway (TSX:CNR)
Canadian National Railway (TSX:CNR) is the largest railway company in Canada, and as such has become a no-brainer when referencing Blue Chip stocks here in Canada.
With over 33,000 kilometers of track, CN Rail is engaged in the transportation of forest, grain, coal, sulfur, fertilizer, automotive parts, and more.
CN Rail is a company that is growing the dividend at an impressive pace. It has a dividend growth streak of 25 years and a five-year dividend growth rate of 12.97%, the stock's consistent rise in price has resulted in a low yield (1.93%).
Don’t fret. The company may lack in yield, but it makes up for that in capital appreciation.
Over the past decade, it has returned more than 309% to investors. This type of performance out of a large cap, blue chip company is quite impressive.
Simply put, CP Rail and CN Rail are some of the best railways in North America, which is why they're both on this list.
Prior to the Kansas City Southern fiasco, CN Rail had been performing exceptionally over the last year. However, it aggressively stepped in and upped a bid for KC Southern, one that was viewed as a large overpayment by the company, and its price has since fallen.
In fact, the company's drastic dip recently has caused it to underperform the TSX Index over the last 3 and 5 year periods. However, when you span it out to a 10 year timeline which you'll see below, it is still crushing the Index overall.
The KC Southern situation will likely take a year at minimum to resolve, and the feud between Canada's railways will likely continue. However, the acquisition attempt by CN Rail has been shut down, yet its price remains depressed.
So, this could be a situation where investors could step in and snatch up this company at a discount. In fact, it reminds us exactly of the Alimentation Couche Tard failed acquisition attempt of Carrefour. It took Couche-Tard a little over 3 months to recover from the 20% dip in price after the acquisition was released.
Moving on, despite its size, CN Rail has been able to adapt, re-route and focus operations on those customers that ran essential services.
The company’s handling of the pandemic has been rightfully lauded by industry experts. Investors are in good hands with CN Rail, and the short term negative sentiment due to the acquisition attempt will, in our eyes, be quickly forgotten.
Right now, Canada's railways look expensive. However, they've always looked expensive. If you're looking to add, timing the market on either CN or CP Rail will likely be a wasted effort. Just scoop them up and tuck them into the core holdings of your portfolio.
10 year dividend adjusted return of CNR vs the TSX:
2. Royal Bank of Canada (TSX:RY)
The Royal Bank of Canada (TSX:RY) is probably one of the most popular stocks here in Canada. There is a reason the stock is one of the top holdings in nearly every single Canadian bank ETF.
The company is a global enterprise, with operations in Canada, the United States, and 40 other countries.
The company has been named one of Canada's most valuable brands for 6 years running, and its reputation is second to none in terms of customer satisfaction. With a market capitalization of nearly $180 billion, Royal Bank is one of the best Blue Chip stocks to add to your portfolio today.
The company's dividend is strong, with a yield of 3.47% and an ten-year dividend growth streak. The dividend is also growing at an impressive pace, with a five-year growth rate of over 6.85%.
The Canadian banking industry is one of the strongest sectors in the country, if not the world. While banks around the world were slashing dividends and closing their doors during the 2008 financial crisis, all of the Canadian banks held strong. Although their share prices fell considerably, recovery was quick and their dividends were never cut.
Although banks struggled during this pandemic, a similar theme is occurring – reliable dividends and better than expected earnings.
While many countries are asking banks to cut the dividend, or some are being forced to as a result of the pandemic, Canada’s big banks remain among the safest income stocks on the planet.
The Feds have asked the banks not to raise dividends, a small and reasonable ask considering the current environment.
However, now that we are getting to the other side of this pandemic and restrictions are easing, it is very likely we see restrictions on dividend growth removed. And, Royal Bank, along with all of the other Canadian major banks, will likely raise dividends very soon after given the green light.
Royal Bank's international exposure and sheer size was brought to light during the COVID-19 pandemic, and it ended up being one of the more reliable Canadian stocks of 2020. As such, it's worthy of its blue-chip title.
You can't go wrong with any of the Big 5 banks here in Canada. They are all excellent Canadian Blue Chip stocks, and we could just as easily include all 5 on this list. However, Royal Bank is certainly one of the best.
10 year dividend adjusted return of RY vs the TSX:
1. Fortis (TSX:FTS)
You won't find a Blue Chip stock list that doesn't contain Fortis (TSX:FTS) – at least you shouldn’t. If you do, maybe keep looking.
This Canadian company is among the top 15 utilities in North America, and has over 10 utility operations under its belt in Canada, the United States, and the Caribbean.
The utility industry is highly regulated, which often leads to consistent cash flows. As the population keeps growing, energy demands will grow right along with it and utility companies are positioned to profit.
Fortis has the second longest dividend growth streak in the country at 47 years. This has cemented the company as one of the best investments in Canada and definitely worthy of its blue-chip title.
Yielding 3.68%, the company has grown dividends at a 5 year rate of 6.79% with a payout ratio of only 59.61%. The good news?
Fortis recently extended its targeted annual dividend growth rate of 6% to 2025. That means investors can expect a 6% annual raise to the dividend in each of the next five years. That type of transparency and reliability is rare.
Utility companies rely heavily on debt to finance capital investments. As such, these companies are prone to setbacks when interest rates rise. This is something you need to keep an eye on if you're looking to invest in a Canadian blue chip stock like Fortis.
The Bank of Canada has changed its tune on interest rates, and we could see them rise as early as 2022 to prevent the economy from overheating as a result of reopening's on the back end of the pandemic.
However, even if the BoC were to raise interest rates, it will likely take many subsequent raises to get back to even pre-pandemic rates.
And in addition to this, rising interest rates seemed to have no negative consequences for the utility giant's stock price over the last couple of years.
Fortis’ stock is as close to a set and forget investment as you can get.