Hi Karl,

Thank you for your feedback.

Since May 2015 (when Deon took over), a handful of former Conservative and Aggressive Holdings were strong enough to merit inclusion in the Dividend Champions, while a number of others are on the Watch List for that portfolio.

As noted in the latest issue, we’ll be looking to add more Legacy Holdings to the Watch List to monitor as eventual additions to the Dividend Champions, while offering swap recommendations for some of those that don’t make the cut.

Like the Dividend Champions, the Legacy Holdings offer a range of yields from low to high. But you’re right: Some names in the latter currently have significantly higher yields than the highest-yielding names in the former.

However, it should be noted that some of the high yields among the Legacy Holdings have been further inflated by declines in share price, particularly among those entities facing challenges at a fundamental, operational or macro level.

And that gets to the heart of what Deon has tried to do with Canadian Edge: A return to focus on high-quality dividend payers with rising payouts.

After all, you don’t get a high yield without higher risk. And a high yield becomes less attractive if a business can’t sustain its payout, or if it somehow manages to support the dividend, but the underlying security suffers a steep decline.

Beyond that, the high-yield space is much more finite than you might imagine. There are just 48 Canadian stocks with market caps of at least CAD250 million that yield 6% or higher.

And if you’re looking for a high-yielding stock that offers the right trade-offs between risk and reward for conservative income investors, then the pool of suitable portfolio candidates shrinks even further. For example, if I screen out those companies with extraordinarily high leverage of at least 5.0x net debt to EBITDA, then that list shrinks to just 13 names.

And that’s just one criterion–as we focus on narrower subsets of securities, our criteria for what makes a Dividend Champion get even more stringent.

This situation certainly doesn’t preclude us from adding higher-yielding names to the Dividend Champions, especially if they have strong fundamentals and are trading at attractive valuations. Indeed, two of the high yielders that Deon added to the Dividend Champions over the past year-and-a-half were subsequently taken over at significant premiums.

In addition to the size of the payout itself, yield is also partly a function of share price. And the yields listed in the current portfolio tables offer just one snapshot in time.

For instance, many of the fundamentally strong Dividend Champions have seen yields compressed this year due to strong share-price appreciation. In January, for instance, Inter Pipeline was yielding 7%. Now it’s yielding around 5.6% due to the strong gain in share price this year.

Lastly, we’re keenly aware that many subscribers are looking for high-yielding securities to generate current income.

But dividend growth is almost as important as current yield. Not only is a rising payout suggestive of a company’s fundamental strength, it also means you’re getting a regular pay raise.

You might be surprised by how quickly dividend growth can compound income (and wealth), especially if you purchase a dividend grower at an attractive valuation.

Best regards,
Ari