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Gleaning companies' dividend-paying prospects

What we are looking for?

Yesterday, we focused on dividend coverage as one way to use earnings per share to weigh the desirability of a stock. Unfortunately, we used some flawed data that unintentionally mischaracterized the state of some dividends. Today, we are printing the same list of 20 Canadian stocks with correct yields and dividend coverage.

More about today's screen

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The dividend coverage ratio is calculated by dividing a company's share profit by its dividend per share and helps determine which businesses have the greatest ability to raise payouts to shareholders and which may have to cut their dividends. A ratio of less than one means that the company is not earning sufficient money to pay its dividend, says Colin Cieszynski, analyst and education manager at CMC Markets Canada.

In calculating the stocks with some of the highest and lowest dividend coverage ratios, Mr. Cieszynski used data from the last 12-month period. He also used 12-month trailing data to calculate the dividend yields. Furthermore, he excluded income trusts from his calculations because they pay distributions from cash flow rather than net income.

A low coverage ratio with a high yield suggests that the market may already be pricing in a dividend cut. A low coverage ratio and a low yield suggest the Street does not expect a dividend cut. Not surprisingly, companies with high coverage ratios all have low yields, pointing to room for a dividend hike, Mr. Cieszynski explains.

What we found

Manitoba Telecom Services Inc. offers the highest dividend on the list, but it's also a prime candidate for a cut, based on the dividend coverage ratio of less than one. At the other end of the chart, Quebecor Inc., with a payout of less than 1 per cent, looks like a good bet for a dividend hike.

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