10 Top Canadian Dividend Stocks to Buy (and Never Sell)

My buddy Value Stock Geek asked a really interesting question last week.

(Aside, if you’re not following his newsletter or his Twitter, you’re missing out. He’s easily one of the more interesting guys in the financial space)

The discussion it generated was fantastic. Dozens of smart investors weighed in, naming the highest quality companies they could think of. The common refrain was if selling was never an option, then valuation would be almost meaningless. You’d be forced to focus on qualitative factors, which ultimately lead to higher long-term returns. You’d also be incredibly selective, since changing your mind and selling isn’t an option.

I quickly thought about it and gave VSG my opinion, based on the part of the market I follow closely, Canadian dividend stocks.

Like I said — I really didn’t think about this much. I fired off a reply to a tweet and went on with my day. But it turns out that more than 11,000 people read it, with at least 100 either liking it or adding it to their bookmarks for easy access later.

I also got some feedback that said I missed a few — and it was great. One person mentioned I didn’t put either of Canada’s main railroads on my list, which was a definite oversight. Another asked why I had no love for Alimentation Couche-Tard, the convenience store giant, which has also put up excellent long-term returns. Again, this was great feedback — I simply forgot about Couche-Tard. I also realized on my own I had forgotten some great companies.

Now that I’ve had a week or so to think about about it, I’d like to update my list. But first, let me share the criteria of a never-sell stock for this Canadian dividend investor.

Nelson’s version of never sell

One thing I really didn’t understand about VSG’s exercise was why people were so willing to buy non-dividend payers as part of a never sell portfolio. Sure, they have the potential to deliver outsized returns, but I’d argue that doesn’t really matter if you can’t ever access your money. I guess the hope is they’d eventually pay a dividend, but that involves a little too much guesswork for me.

One way you can access your money in such a situation is to take margin loans out against your holdings, but I doubt many people reading this would consider that an ideal solution. Paying interest to access your own money isn’t quite repulsive, but it’s pretty close.

There’s no debating it. For any stock to end up in my never sell portfolio, it would need to pay a dividend. In fact, I’ll take it a step farther and say that I would need dividend growth. That would ensure I select companies with growth potential, which is paramount for a never sell portfolio. I’ll mostly disregard dividend yield, since it’s not super important for this exercise.

Like so many of the other suggestions, I’d be looking for excellent businesses. I’d be less likely to look at valuation, but I wouldn’t ignore it. A stock trading at say 50x earnings can easily fall to 25x earnings if investors fall out of love with it. It takes an awful long time to recover from such a fate, especially if the stock remains at 25x earnings.

I’d put more of an emphasis on competitive advantage, ensuring my choices had solid moats. The last thing I’d want is for 10% of my portfolio to be disrupted by some sexy new technology a decade in. There’s always going to be a chance that happens, but I can minimize it by focusing on old-school businesses or ones that have a history of keeping up with new technology.

Since I’m a Canadian investor who lives in Canada and pays most of his expenses in Canadian Dollars, I’m going to choose Canadian stocks. As you’ll see, many of my choices do generate revenue and profits from various other countries, making my portfolio much more diverse than it would appear at first glance.

I’ll choose each stock and then give a short paragraph-length summary about why I picked it.

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The never sell portfolio - part 1

Now that we’ve taken a closer look at the thought process behind my never sell portfolio, let’s look at the names. You’ll notice some similarities with the original list, but also some considerable differences.

Let’s start things off with perhaps the finest stock in Canada. There’s a reason why Royal Bank of Canada (TSX:RY) is the largest publicly-traded company in Canada, and largely the most respected, too. It’s a behemoth that boasts a top-two ranking in every major banking category in Canada, ranging from deposits to mortgages to wealth management. Combine that with conservative management, a strong balance sheet, better than average return on equity, and the federal government backing its riskiest mortgages (thanks, CMHC!), and it’s little wonder why Royal is atop this list. What a beast.

My second choice is going to be another bank. Although I love TD (TSX:TD), own a bunch of it, and think it’s about as solid as banks get, I’ve got to go with National Bank (TSX:NA). National is just as disciplined as RBC, but it has better growth potential and its management team is laser-focused on delivering elevated returns on equity. National is consistently the leader among its peers in this all-important banking metric, and long-term results reflect that. Combine that with this Quebec-based bank’s potential to grow across Canada over time — never mind internationally, where they already have a presence in Cambodia — and it checks off all the boxes. I own it — just like I own Royal — and have zero plans to sell.

Next I’m going to stick with Fortis (TSX:FTS) as my third pick, which I believe is one of the best utilities in North America. It has a 50+ year streak of increasing its dividends (calling it now: it’ll be 51 years in November), driven by its conservative business model, its presence in the boring and predictable regulated utility business, and smart acquisitions made over the years. Fortis is the very epitome of a get rich slow asset, and I’m happy to own it — especially as things like electric cars add to the pressure on the grid over time.

I’ll deviate from the list for the next pick, but not this time. Dollarama (TSX:DOL) is simply the best retailer in Canada, plus its expansion into Latin America proves the concept will work anywhere. It still has growth potential, with my estimates concluding the company can more than double in size in Canada alone, never mind the rest of the world. Plus, dollar stores are wonderful businesses. Since you only have to carry enough stock to cover 10,000-15,000 square feet, its easy to focus on good sellers with nice margins while ignoring the rest of the stuff grocery stores have to carry (like milk, eggs, cheese, to name a few).

The only downfall? The stock is expensive at around 30x earnings.

Now it’s time to pivot. Originally on the list I chose A&W (TSX:AW.un), which I still believe is Canada’s best-ran burger chain. It’s a great company but I simply don’t believe a fast food restaurant has a moat comparable to a railroad, so I’m choosing Canadian National Rail (TSX:CNR) instead.

CN has 18,800 route miles of track that simply can’t be replaced no matter how hard someone might try. It continues to grow each and every year by making its trains more efficient and passing through price increases to customers. It offers the best and most cost-effective way to ship goods throughout North America. Its network offers customers access to ports on Canada’s Pacific and Atlantic costs, as well as the Gulf of Mexico in the United States. And it has a demonstrated history of both dividend growth and share repurchases — exactly what we want to see over the long-term.

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The never sell portfolio - part 2

Next up is another pivot. Metro Inc. (TSX:MRU) is an excellent grocer which has delivered great long-term returns. I also believe Canada’s grocer have pretty solid moats after building up these huge real estate empires that they effectively control.

So instead of picking the grocer, I’m going to pick what I view as Canada’s finest retail REIT — Choice Properties REIT (TSX:CHP.un). It’s Canada’s largest REIT with 705 properties in its portfolio with a consistent 97%+ occupancy rate. The portfolio is approximately 70% retail properties, primarily Loblaw-anchored buildings with significant potential to take away a little parking and intensify the site. Combine that with its ability to raise rents over time, its solid balance sheet, and smart expansion into industrial and residential space (without levering the balance sheet), and the Weston family having a large ownership stake, and Choice is my choice.

If it’s not the finest REIT in Canada, it’s pretty damn close.

I’m sticking with my next choice. TMX Group (TSX:X) is the owner of the Toronto Stock Exchange, Montreal Exchange, and various other capital markets-related assets, including information products and various institutional trading platforms. It is an irreplaceable asset that forms the backbone of the capital markets in Canada. It has quietly delivered excellent long-term returns — including reinvested dividends, the stock is up 339% in the last decade, or just under 16% per year — with terrific pricing power, long-term growth in areas like options trading, and one of the strongest balance sheets you’ll ever find. It’s one of the highest quality businesses in my portfolio and in Canada in general. I’ll never sell.

I’m was a little conflicted about my next choice, but ultimately I stuck with Brookfield Asset Management (TSX:BAM). BAM is responsible for investing the torrent of cash flooding in from various clients, which is projected to grow by about 15% per year for the next few years. It has a much-deserved reputation as one of the best asset managers in North America, which helps to ensure the cash keeps coming in. Plus, BAM’s management has already pledged to pay out most of its earnings back to investors in the form of generous dividends, giving it a rare combination of offering a generous dividend yield (currently 3.7%) and the potential for dividend raises (10%+ annually through at least 2025, at least according to analysts that cover the stock).

Besides, asset management is a wonderful business, one that can grow for a very long time without the need for big investments.

Originally I chose Capital Power (TSX:CPX) for my ninth choice, but once again I’ll switch it up. Intact Financial (TSX:IFC) is one of North America’s best property and casualty insurers, which has quietly put up excellent growth using a well-tested growth-by-acquisition model. It now has operations in Canada, the United States, and Europe, and will use each as a hub to make future acquisitions in their respective regions. Intact also has a well-deserved reputation as a conservative underwriter, consistently keeping its all-important combined ratio comfortably under the magic number of 100. Combine all that increased yields from Intact’s $35B+ investment portfolio, and this analyst thinks Intact’s reputation is well deserved.

Rounding out our list is Telus Corporation (TSX:T) and, perhaps not surprisingly, choosing to keep or punt Telus was the hardest decision of all. Especially as shares flirt with a 52-week low amid a price war in Canadian telecom.

I decided to keep it, despite the negative near-term picture.

Telus is a wonderful business that has spent decades building up an enviable wireless network across Canada. Instead of expanding into media, like its peers, Telus expanded into various technology solutions, eventually spinning out a portion of its tech assets into Telus International (TSX:TIXT). Unfortunately, this spin-out hasn’t performed well and trades significantly under its IPO price. Still, these are good assets, and they should turn around the weak performance.

Telus’s best assets are its telecom assets. It has spent tens of billions over the last two decades building an irreplaceable wireless and wireline network. It now boasts over 10M wireless customers — growing steadily thanks to robust Canadian immigration — and pricing power on its wireline business. Yes, Telus has to deal with suddenly aggressive competition, but Canadian telecom has been a competitive market for years now. It’s nothing new.

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Summary

To quickly summarize, my ten top never sell Canadian dividend stocks are:

• Royal Bank

• National Bank

• Fortis

• Dollarama

• Canadian National Rail

• Choice Properties

• TMX Group

• Brookfield Asset Management

• Intact Financial

• Telus

Overall I’m quite satisfied with this list, even if it did end up more financial-focused than I originally assumed. A few honourable mentions that I regret leaving out include:

• Alimentation Couche-Tard

• Canadian Natural Resources (TSX:CNQ)

• Canadian Pacific Rail (TSX:CP)

• Capital Power

• Franco-Nevada Corp (TSX:FNV)

• goeasy Ltd. (TSX:GSY)

• Granite REIT (TSX:GRT.un)

• IA Financial Corp (TSX:IAG)

• Imperial Oil (TSX:IMO)

• Metro

• The North West Company (TSX:NWC)

• Nutrien (TSX:NTR)

• Stella Jones (TSX:SJ)

• TD Bank

As always, I’m interested in hearing from y’all. Hit the reply button (or find me on Twitter) and let me know what stocks would be in your buy-and-hold forever portfolio. Bonus points if they’re Canadian stocks I haven’t mentioned.