Methodology
A systematic, rules-based approach to dividend safety analysis. No discretion. No emotion. No bias.
The Universe
We do not hand-pick stocks. Every morning, our system performs a raw scrape of the entire Toronto Stock Exchange (TSX) from A to Z. No human curation. No editorial bias. Every publicly traded Canadian company starts on equal footing.
This eliminates survivorship bias and ensures we capture the full opportunity set—including overlooked securities that institutional analysts may ignore.
The Safety Firewall
Each stock must pass through a multi-layer screening process. A single failure results in automatic rejection. No exceptions.
1. Market Capitalization: > $500M
Rule: Only companies with a market cap exceeding $500 million qualify.
Rationale: This threshold filters out micro-cap and penny stocks, which exhibit high volatility and liquidity risk. Institutional-grade portfolios require institutional-grade liquidity.
2. Yield Window: 3.5% – 15%
Rule: Dividend yield must fall between 3.5% and 15%.
Below 3.5%: Insufficient income generation. The opportunity cost relative to risk-free assets is not justified.
Above 15%: Statistically correlated with financial distress or data errors. High yields often signal an imminent dividend cut or bankruptcy risk—commonly referred to as a "yield trap."
3. Payout Ratio: < 95%
Rule: Total dividends paid must not exceed 95% of earnings.
Rationale: A payout ratio above 95% indicates the company is distributing nearly all—or more than—it earns. This leaves no margin for reinvestment, debt repayment, or cushion during economic downturns. Dividend sustainability requires earnings coverage.
Valuation: The Graham Number
To estimate intrinsic value, we apply the Graham Number—a fundamental analysis formula developed by Benjamin Graham, the father of value investing.
Fair Value = $$\sqrt{22.5 \times EPS \times BookValue}$$
EPS: Trailing twelve-month earnings per share.
Book Value: Net asset value per share (total assets minus liabilities).
22.5 Constant: Represents Graham's suggested maximum P/E ratio of 15 and price-to-book ratio of 1.5 (15 × 1.5 = 22.5).
A stock trading below its Graham Number is considered undervalued. A stock trading above it may be overpriced. This metric removes subjective guesswork from valuation decisions.
Risk Audit: Beta
We calculate Beta to measure a stock's volatility relative to the broader market index.
Beta = 1.0: The stock moves in line with the market.
Beta > 1.0: The stock is more volatile than the market (higher risk, higher potential return).
Beta < 1.0: The stock is less volatile than the market (defensive, lower risk).
For dividend-focused portfolios, we generally prefer securities with Beta < 1.2, as extreme volatility undermines the stability investors seek from income-generating assets.
The Result
This system is designed to remove human error, cognitive bias, and emotional decision-making from the investment process. It does not rely on analyst opinions, management guidance, or market sentiment.
Instead, it executes a disciplined, repeatable framework based on quantitative thresholds and time-tested valuation principles. The output is a curated list of dividend-paying Canadian equities that meet institutional standards for safety, yield, and value.
No discretion. No emotion. No bias. Just data.