The 15 Best Dividend Stocks in Canada for 2023

Seasoned investors will know that the stocks with the highest dividend yields are not always the best dividend stocks. Yes, higher yields are a feature of most dividend stocks. But a rising dividend yield can simply be a function of a declining share price. And, of course, this can be a sign of problems in the underlying business. It’s important to factor all this in, particularly given the range of attractive dividend stocks in the Canadian market. While there are other stable Canadian companies not featured in our list of the 15 best dividend stocks in Canada, those listed below best match our criteria.

How we picked the best Canadian dividend stocks

With all of that in mind, it is worth highlighting what factors investors should consider when picking dividend stocks. High on the list is a company’s track record for raising dividends. The same way that a dividend cut is a sign of bigger problems, companies that are able to raise their dividends on a regular basis are demonstrating the strength and the growth in their business. Analysts keep a close eye on a company’s dividend policy. That refers to both the dividend payout ratio and whether or not dividends have been growing over time. 

Dividends are usually a function of earnings. So it stands to reason that companies generating earnings growth will be in a better position to raise dividends as well. Companies will experience more variation in their earnings depending on which industry they belong to. The energy sector and the basic materials sector combined, make up a large portion of the Canadian equity market. In spite of the cyclicality of those industries, several have a good track record of paying out and raising their dividends.   

Valuation

Aside from earnings growth, analysts usually want to have a sense of a stock’s valuation. So even if a company has a history of raising dividends, investors would like to know that there is still room for the share price to increase. There are several ways to gauge valuation. The list below takes into account the stock’s trailing twelve months Price/Earnings Ratio (P/E ttm), which compares the company’s share price to its earnings per share over the last 12 months.  

A Word About Financial Services Stocks

By far the most prominent sector in the Canadian stock market is financial services, which makes up about 30% of the S&P/TSX Index. These include Canada’s largest banks and insurance companies. They are among Canada’s most solid companies and, not surprisingly, they also come with very attractive dividend yields. Indeed, it would be possible to make a list of Canadian dividend stocks almost entirely with companies from this sector. Banks and insurers are well represented, but the list below aims to offer investors a little more variety. 

How to invest in dividend stocks in Canada?

In order to invest in dividend stocks in Canada, you’ll first need to open a brokerage account. These online accounts allow you to purchase a variety of shares, including dividend stocks. Here are three online brokerages to consider:

Qtrade

Qtrade, renowned for its exceptional customer service and user-friendly interface, is a great choice for all types of investors. It offers comprehensive research tools to assist you in making informed decisions about your dividend stock investments.

Questrade

Offering competitive pricing and a wide range of account types, Questrade provides a flexible platform for different investment strategies. It features a robust interface that makes managing and diversifying your portfolio with dividend stocks more efficient.

National Bank Direct Brokerage

For those who prefer the traditional banking environment and zero-commission trading, National Bank Direct Brokerage combines banking and investment services seamlessly. It provides extensive support and resources to guide you in selecting the right dividend stocks.

The Best Dividend Stocks in Canada

Having outlined our methodology for selection, it’s time to delve into our top picks. So, without further ado, here are our top Canadian dividend stocks:

Agnico Eagle Mines (AEM:TO)

Agnico Eagle is the lone mining company on the list. It is one of Canada’s largest gold miners and as can seen above, the company’s track record of raising dividends over the last five years is excellent. One of the features of AEM that makes it more attractive than several other mining companies is that the company’s production and exploration come from countries with less political risk. Aside from Canada, AEM has operations in the United States, Mexico and Finland. 

On the domestic front, AEM is in the midst of consolidating a number of key acquisitions in the coming months that will lead to a big jump in gold production. This includes assets from its merger with Kirkland Lake Gold and the acquisition of the Canadian assets of Yamana Gold. Nevertheless, AEM’s share price is down since the start of the year. This is due to lower production guidance from management for 2023 and 2024. 

Alimentation Couche-Tard (ATD:TO)

Alimentation Couche-Tard (ATD) is well known as an operator of convenience stores under the Circle K and Couche-Tard brands. What is probably less well known is that about 66% of ATD’s revenue comes from the United States. Another 21% comes from Europe and the rest of the world and only 13% from Canada. While ATD’s dividend growth has been solid in recent years, earnings growth has led to an appreciation in the share price that has been nothing short of phenomenal. 

From a product mix point of view, fuel makes up 47% of ATD’s gross profit. Some investors see this as a threat as the world turns more to electric vehicles. Although this shift will take years, ATD’s management has started to address the need for more charging stations across North America and Europe. In fact, ATD views this as an opportunity as charging electric vehicles leads to longer wait times for customers and increased merchandise sales in their stores. 

Bank of Montreal (BMO.TO)

Bank of Montreal (BMO) is the first major bank on this list. Of those, BMO boasts the most impressive earnings growth over the past five years. Dividend growth has also been solid over the same period. BMO has a well diversified revenue mix of Canada Personal and Commercial (P&C) banking, U.S P&C, Capital Markets and Wealth Management.  

As is the case with the other banks, BMO is also active in the mortgage market. And with interest rates still rising, this will begin to take a toll by way of an increase in non-performing loans. However, BMO has less exposure to the Canadian housing market than its peers. Furthermore, BMO’s U.S. business is likely to be a driver of future growth. Given the current dividend yield of just under 5.0%, it’s hard to overlook the long term investment case for BMO. 

Canadian Natural Resources (CNQ:TO)

Canadian Natural Resources Limited (CNQ) is the only energy company on our list. And given that it operates in such a highly cyclical sector, both its earnings growth and its dividend growth in recent years are truly remarkable. It also has a long track of raising its dividend. In fact, CNQ was even able to do this in years when the oil price was well below $50/barrel. With the current environment of crude oil hovering around $70.00/barrel, CNQ is likely to see continued earnings growth. This, in turn, will allow the company to return those earnings back to shareholders by the way of dividends. 

Of course, a steep decline in the oil price will lead to weakness in CNQ’s share price. Investors who would rather not time their exit from an energy stock may prefer to increase their exposure to dividend stocks through other sectors. 

Canadian Tire (CTC-A:TO)

As indicated above, the investment case for Canadian Tire’s Class A (non voting) shares begins with the undemanding P/E ratio of 11.7 and a dividend yield of just over 4.0%. The dividend growth rate of 17.6% also places the company among the better dividend growers. Nevertheless, investors tend to overlook Canadian Tire. Perhaps this is because it is known primarily for its flagship stores. But in 2022 these stores accounted for less than 60% of the group’s total revenue. 

Canadian Tire has been able to diversify from its primary retail business. The company’s other main lines include Canadian Tire Financial Services, SportCheck, Mark’s, Helly Hansen and finally the company’s Petroleum business. The company has been investing heavily in its online business to improve ecommerce sales. These investments appear to be paying off as Canadian Tire is now the second most visited online retailer in Canada.  

Cogeco Communications (CCA:TO)

Cogeco Communications (CCA) is the only telecom services provider on this list. The Quebec-based company operates in two major segments, Canadian Broadband and American Broadband services. The shares currently offer an attractive dividend yield. And dividend growth, at 10.4% over the last five years, has been more than respectable. But what stands out above is CCA’s remarkably low P/E ratio. 

CCA’s low valuation is likely, in part, attributable to the company’s high level of debt and rising interest expense. A company’s debt position can be measured and analyzed to see how it has been changing over time. It’s clear that many investors are not comfortable with CCA’s balance sheet and this is reflected in the drop in CCA’s share price over the last two years. While some investors may see the decline as a buying opportunity, others will stick to dividend stocks that come with a much more manageable level of debt. 

Enghouse Systems (ENGH:TO)

Enghouse Systems Limited (ENGH) is an outlier on our list for at least two reasons. For starters, it is the only company in the group in the technology sector. Technology stocks usually fall into the category of growth stocks, and are not known as big dividend payers. Second of all, ENGH is one of the smallest companies on our list in terms of market cap with a value of about $1.8 billion. This makes ENGH a small cap stock, which means it will likely be more volatile than your ‘run of the mill’ dividend stock. However, with 18.1% dividend growth over the last five years, and solid earnings growth over the same period, ENGH deserves some consideration. 

The company operates in two main segments. The first is customer interaction software and the second offers a variety of software and technology solutions to a wide range of industries. ENGH’s share price is well off its pandemic high, as the stock rode the ‘work from home’ wave that many other technology stocks enjoyed. But given that the company continues to generate strong free cash flow and has very little debt, the stock has more room for recovery. 

Finning International (FTT:TO)

Finning (FTT) is the only industrial stock on our list. The company sells, services, and rents heavy equipment and related products in Canada and abroad. Canada accounts for about 50% of total revenue. Industrial stocks would not be an obvious choice in a recessionary environment, as they would typically be more vulnerable to an economic downturn than other sectors. However, FTT derives a substantial portion of its revenue from the energy and mining sectors. Those sectors have thrived in the current environment of high commodity prices. 

To its credit, FTT has produced healthy dividend growth over the past five years. In fact, the company has increased its annual dividend for 22 consecutive years. Of course, a key risk for FTT is a sharp drop in commodity prices. But seeing as the company has been around since 1933, odds are that it can weather such a storm. 

Fortis (FTS:TO)

Fortis is a utility company with assets in Canada, the United States and the Caribbean. Its operations include power generation, electricity transmission and the distribution of natural gas. Fortis stands out as being a highly defensive stock with a very dependable dividend. In fact, it has increased its dividend for 49 years in a row, which in itself is very impressive. 

Fortis has been able to do this because its business is heavily regulated. So while earnings growth has not been spectacular, cash flows are very reliable. And this has allowed management to increase dividends at a steady rate. This makes Fortis particularly attractive to investors who want a stock with a very secure dividend. Furthermore, the stock has generated an annual average total shareholder return of 9.5% over the last 10 years, indicating that investors in Fortis have also benefited from capital appreciation.  

Goeasy (GST:TO) 

Although goeasy (GSY) falls under the financial services sector, the stock should not be thought of in the same way as Canada’s large banks and insurers. GSY is another small cap stock that has seen a lot of volatility in its share price. This, perhaps, makes it less suitable to investors that are looking for stocks that would be more stable during a downturn. However, both GSY’s dividend and earnings growth over the last five years have been nothing short of outstanding. 

GSY provides lending and leasing services to borrowers who are not able to obtain these loans through more conventional means. As such, the company’s customers are perceived as being less credit worthy. This concern is amplified in an environment of rising interest rates, as investors have some doubts as to how well GSY’s customers will be able to manage their debt during a recession. While this risk shouldn’t be dismissed, it may already be reflected in GSY’s share price, which is at about half of where it stood in the second half of 2021.  

Manulife (MFC:TO)

Manulife Financial Corporation (MFC) is Canada’s largest insurance company by market capitalization. MFC stands out for its high dividend yield and its low valuation. The stock trades at a substantial discount to its peers in the insurance industry, as indicated by its P/E multiple. Moreover, earnings growth has been impressive in recent years. 

MFC’s shares have been flat since the start of the year. This may be due to the performance of the company’s Asian division, which is seen as a key source of future growth. However, as the region was closed down during the pandemic for some time, this growth hasn’t materialized as expected. Also, there has been some concern over MFC’s exposure to U.S. regional banks in the light of the problems facing that industry. Still, MFC is likely to overcome these near term headwinds and the low valuation may be an attractive entry point for investors. 

Metro (MRU:TO)

Metro, as a consumer staples stock, is one of the more defensive stocks on this list. Its operations include food production and distribution under several banner names, including Metro, Food Basics and Super C. It also operates as a retailer of pharmaceuticals after acquiring the Jean Coutu network in 2018. Both businesses are focused on Quebec and Ontario. 

In spite of its defensive qualities, Metro’s shares have performed very well over the long term and have outperformed the broader Canadian market. Furthermore, Metro’s track record for dividends is excellent. The company has managed to increase its dividend for 28 years in a row. The dividend growth rate in recent years, at 11.4%, has been particularly impressive. Recent weakness in the share price represents a good entry point for investors looking for a solid dividend stock that they are willing to hold for the long term.

National Bank of Canada (NA:TO)

National Bank is the smallest of Canada’s big six banks in terms of market capitalization. But most investors would be surprised to learn that it has generated the highest return of the group since the end of the financial crises. This is a reflection of the bank’s earnings growth, which at 12.3% over the last five years, puts it ahead of the  peer group. 

As National Bank is based in Quebec, it still derives about half its revenue from that province. The bank has less of a presence internationally and in the U.S. compared to the other large Canadian banks. Nevertheless, the bank is well diversified in terms of its major business segments, which include personal and commercial banking, wealth management, and financial markets. National Bank’s dependence on the Quebec market is a risk. However, until now, the bank has done a good job of growing its various lines of business within its boundaries.  

Royal Bank of Canada (RY:TO)

Last but certainly not least of Canada’s large banks, Royal Bank of Canada is Canada’s largest company in terms of market capitalization. Over the past five years, both dividends and earnings have grown at a moderate, yet steady pace. Similar to BMO, Royal Bank generates revenue from several segments. Aside from retail and commercial banking, the company has a strong presence in both investment banking and wealth management. 

The Canadian banking sector, in general, has underperformed the broader market since the start of the year. This is largely due to the problems faced by the regional banks in the United States, which have spilled over into the Canadian market. However, this ‘crisis’ as some have referred to it, is unlikely to have a big impact on the Royal Bank in the long run. On the contrary, this relative underperformance arguably makes Royal Bank a more attractive investment at the current share price. 

Sun Life Financial (SLF:TO)

Sun Life is another of Canada’s large insurance companies with a market capitalization of just under $40.0 billion. The company has managed to diversify its business along four major segments. They are Sun Life Canada, Sun Life U.S., Asset Management and Sun Life Asia. The company has operations in several of Asia’s largest markets where the insurance industry benefits from lower penetration rates. As with Manulife, Sun Life sees the region as a major driver of future growth. 

Sun Life offers an attractive dividend yield at 4.5%. Over the last five years its shares  have performed slightly better than its peers in the financial sector. But with a P/E ratio of 12.2 and continued steady earnings growth, there is room for further capital appreciation.

How to evaluate dividend stocks?

Now that you know what our top Canadian dividend stocks are, let’s take a look at the key metrics required to evaluate these companies. You need to understand which dividend-paying company to buy and hold over the long-term. The below financial metrics will help you understand if a company is worth investing in or not, as well as identify potential red flags.

Dividend Yield

The dividend yield is calculated as a percentage of a company’s stock price. So, in case a stock trades at $100 and pays an annual dividend of $5, the dividend yield would amount to 5%.

While a higher dividend yield is always attractive you need to understand that it is inversely related to the stock price. For example, if the stock price of the company falls by 25% to $75 its dividend yield will increase to 6.7%.

Payout ratio

This is another important metric investors should use while evaluating dividend stocks. The payout ratio is calculated as a percentage of a firm’s net earnings. So, if the firm earns $5 per share as its net income and pays dividends of $3 per share, it has a payout ratio of 60%.

If the payout ratio is low, it means the company has more room to reinvest its earnings in capital expenditures which in turn will bring in additional cash flows. Alternatively, the company can also look to increase dividends.

Earnings per share

The EPS (earnings per share) ratio is derived by dividing a company’s net income by the total number of shares outstanding. It basically tells you the amount of money a company makes for each outstanding share. Now, you need to shortlist companies that have grown earnings over time. This indicates the company is able to improve its bottom-line which in turn will help it sustain dividend payments.

Price to earnings

The price to earnings multiple is a popular valuation ratio that shows us how expensive a stock is. It is calculated by dividing the price of a stock by its EPS. As a rule of thumb, in case a company’s P/E ratio is lower than the sum of its earnings growth and dividend yield, it is undervalued and vice versa.

Avoiding the dividend yield trap

Investors without any experience in the equity markets might equate a high yield as an attractive investment opportunity. However, as we have seen above, while a high yield is a good filter to identify dividend stocks, you need to look at the reasons behind these figures.

In case a stock continues to spiral downwards, it means it is fundamentally weak or is impacted by macro-economic factors. It may also lead to a dividend cut which may further impact the stock price. So, how do you avoid falling into a dividend yield trap?

Just buying stocks due to their high yield is a recipe for disaster. If a company has a forward yield that is significantly higher than its industry peers, it may be a red flag. You need to look at the company’s payout ratio as well as analyze its balance sheet, income statements, and cash flows.

A company with a stellar dividend history and one that has increased dividends each year indicates that it has a solid business model that allows it to generate cash flows to support an increase in payouts.

It’s always better to buy a stock with a lower dividend yield that is sustainable compared to a stock with a high yield that may be rolled back if markets turn ugly.

Dividends are not a guarantee

Investors need to understand that dividend payments are not a guarantee and can be suspended at any time. When oil prices crashed in 2020, several companies such as Suncor Energy cut their dividends. Many others suspended their payouts indefinitely.

Dividends are part of a company’s profits. Generally, a company can look to reinvest its net income to expand its capital expenditure program, lower its debt or acquire other companies to benefit from inorganic growth.

Dividend payments are not compulsory and if a company is looking to reduce costs or is grappling with negative profit margins, there is a good chance for dividends to be at risk.

It is thus imperative to build a portfolio of quality dividend-paying companies across sectors to mitigate risks. Like every other asset class, it is not possible for dividend investors to eliminate their risk completely.