I just wonder whether Deon considers #1 the best and #6 the worst (back to the old system?). Artis stands as #2,while in the last month’s newsletter it was 6. BDT is 3 now,but last month (I believe) it was moved to Aggressive Portfolio. Same goes for INE. Last month rated 5,but now it stands @ 1.

Frank

Good questions. We upgraded the Safety Rating System for How They Rate because we felt it wasn’t stringent enough and it was allowing some companies with financial weakness in some areas to get higher scores than they deserved. You can see in the footnotes to How They Rate how the system has changed – including the addition of the “Altman Z- Score Plus – In order to determine revenue reliability – a point was awarded for passing one of the financial world’s most rigorous solvency metrics.”

I’ll make sure we draw attention to that now, and in the future.

And, the higher the score the higher-rated the company.

Hi Doug,

In addition to what Bob noted with regard to the How They Rate tables, I wanted to address your question about the new Dividend Champions Portfolio. For the new Portfolio, we’re now employing a slightly different methodology for stock selection that’s embodied in the Quality Score. As the footnotes below the table state:

“[The Quality Score] indicates our assessment of whether the company will be able to sustain and grow its dividend over time. The range is between 0 (lowest) and 5 (highest). Factors considered include the strength of the balance sheet, the cash flow, the cyclicality of the profit, dividend cover and dividend track record.”

Deon, CE’s new chief investment strategist, further expands upon this methodology in Portfolio Update, which is on page 5 of the PDF, or you can view the article directly via the following link:
http://www.investingdaily.com/canadian-edge/articles/22739/the-dividend-champions-portfolio/

As you’ll likely notice, these are many of the same fundamental principles that underpin our legacy Safety Rating System.

Finally, in reviewing and tweaking the legacy Safety Rating System, we determined that the usual metrics applied to individual companies weren’t as instructive for pooled investment vehicles such as closed-end funds and exchange-traded funds. As such, we are looking into an alternative approach to rating these securities.

Best regards,
Ari

Hi Andy,

We finished our review of the Safety Rating System’s methodology last week and completed our recalculation of the Safety Ratings over the weekend, so it’s not like these ratings changes were made weeks ago, and we’ve simply been sitting on them ever since.

Initially, we had intended to preserve the Safety Rating System’s existing methodology, but when Investing Daily’s analyst team subjected it to further scrutiny, we determined that certain metrics were providing an incomplete picture of a company’s ability to sustain its payout.

Consequently, the resulting tweaks have generally made the Safety Rating System more conservative than it was previously. We think that’s an improvement.

At the same time, as I’ve noted in my replies to other subscribers, it’s also important to remember that the Safety Rating System is focused on the sustainability of a company’s dividend. And while it aggregates a number of key fundamental data that are suggestive about the overall quality of a company, the Safety Rating shouldn’t be considered the final word on whether a stock is worth buying or holding.

Indeed, as we’ve frequently stated in the past, a low Safety Rating doesn’t mean a stock is bad or that we don’t consider it a buy for other reasons. It just means that there’s more risk to the dividend relative to its peers. In fact, we’ve had stocks with relatively low Safety Ratings that were rated as a “buy,” as well as stocks with relatively high Safety Ratings that were rated as a “hold” or “sell.”

As you’ll see in the Portfolio Update article, our new chief investment strategist’s approach includes many of the same core principles we’ve had since CE was founded back in 2004. Additionally, we like actually having a man on the ground in Canada, not to mention his extensive professional experience in portfolio management.

Best regards,
Ari

Hi Geoff,

I’m still here! And hopefully my articles will continue to be cool-headed.

There are a few holdovers from CE’s former Portfolios in the new Dividend Champions Portfolio. And all former CE Conservative and Aggressive Holdings will continue to be tracked in How They Rate.

The principles underpinning the tweaks in the Safety Rating System are consistent with the intent of the original system. We swapped out certain metrics to give us a fuller picture of a company’s ability to sustain its payout. In general, the new methodology has made the Safety Rating System more conservative than it was in the past, which should ultimately prove to be a good thing.

In evaluating your current holdings, please remember that the Safety Rating System is focused on the sustainability of a company’s dividend. And while it aggregates a number of key fundamental data that are suggestive about the overall quality of a company, the Safety Rating shouldn’t be considered the final word on whether a stock is worth buying or holding.

Indeed, as we’ve frequently stated in the past, a low Safety Rating doesn’t mean a stock is bad or that we don’t consider it a buy for other reasons. It just means that there’s more risk to the dividend relative to its peers. In fact, we’ve had stocks with relatively low Safety Ratings that were rated as a “buy,” as well as stocks with relatively high Safety Ratings that were rated as a “hold” or “sell.”

Finally, we feel incredibly fortunate to have Deon join our team as CE’s new chief investment strategist. As you’ll see in the Portfolio Update article, his approach to investing dovetails with CE’s longstanding core principles.

And not only does Deon give us the man-on-the-ground perspective from Canada–something that unfortunately can’t be replicated from our offices in the D.C. suburbs–he comes to us with extensive experience in professional portfolio management.

As you noted, his pedigree is, indeed, impressive. He agreed to join us because he not only loves to write, but, as evidenced by the teaching he’s done on the side, he also loves to share his hard-won investing knowledge with others.

Best regards,
Ari

Hi Linda,

Yes, we will continue to hold monthly Live Web Chats. We’ll have an update on that soon.

And, yes, the Safety Ratings and Buy/Hold/Sell advice for our legacy holdings should flow through to your watch list. I just double-checked a few names to be sure.

Best regards,
Ari

Hi Linda,

Although Bird has a significant number of projects outside the energy sector, its stock has been punished due to its exposure to this space. Indeed, to some extent, its near-term price performance has tracked the price of oil.

In early April, the stock hit a three-year low of CAD9.33, down more than 39% from its trailing-year high of CAD15.34 in mid-August.

Thankfully, Bird’s stock has since rallied and is now up about 22.7% from the aforementioned low, aided no doubt by oil’s rebound–North American benchmark West Texas Intermediate crude is up nearly 38% from its low in mid-March–but also by a strong upside surprise for first-quarter earnings. Bird’s results beat analyst expectations by 15.5% on sales and by 18.3% on earnings.

Nevertheless, the stock is still off about 25.4% from its trailing-year high in local currency terms. And management has conceded that lower capital spending from the energy sector will continue to make for a challenging operating environment. So that means the share price could continue to face pressure over the next year or two, or until the energy markets recover.

We do like Bird for the long term, and that’s why we’ve maintained a buy rating. But we understand if two years is too long to wait for share-price appreciation to resume from its former levels, even with a high payout in the interim.

Best regards,
Ari

Hi Linda,

I understand. And I’m assuming that if you were able to invest in these stocks via a tax-advantaged account, then you would have done so already. With the exception of Canadian REITs, most of the securities we cover are exempt from Canada’s 15% withholding tax when held in an IRA.

And your point is well taken about dividends on falling stocks. It’s hard to hold a beaten-down stock even if it has a nice payout. However, our attitude has always been that if a stock is otherwise a solid long-term holding and can maintain its dividend through challenging circumstances, then that means we’re essentially being paid to wait for better times ahead.

Best regards,
Ari

Hi Bernie,

Though it was the stated philosophy of this service all along, in recent years the recommended holdings had drifted from this approach. Now we’re back to focusing on established dividend payers that offer good coverage of their payouts.

Best regards,
Ari