Growth investing is a common strategy for U.S. investors, but it’s a bit more contrarian in Canada. That’s likely because the TSX is packed with dividend-paying value stocks in sectors like financials and energy, which tend to dominate the market.
But if you’re not focused on income and instead care more about share price appreciation, sifting through the TSX for growth stocks can still be worthwhile.
Here, I’ll share my personal criteria for finding Canadian growth stocks and highlight an ETF that can automate the process for you.
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How to find growth stocks in Canada
The first criterion I use might seem counterintuitive, but hear me out – screen out any stock yielding more than 2.5%.
A dividend isn’t free money; it comes directly from the company’s cash reserves. If a firm can earn a return on its capital that exceeds its cost of capital, it’s better off reinvesting in initiatives like research and development, acquisitions, or buybacks, rather than returning that cash to shareholders.
When a company pays out dividends to shareholders, it’s essentially admitting, “As an owner, you can find a better use for this money than we can.” That’s the blunt reality.
Next, I screen for trailing revenue growth and trailing earnings growth above that of a neutral market benchmark, such as the S&P/TSX 60 Index. This ensures I’m focusing on companies that are growing both their top and bottom lines at a faster rate than the aggregate market, signalling stronger performance and momentum.
Finally, I look at projected earnings growth, which is an estimate of how much a company’s profits are expected to grow in the future. This metric is important because growth investing often requires looking beyond what a company has achieved in the past to gauge its potential.
The lazy way to find growth stocks
Let’s be honest – this is a ton of work. After screening for the right metrics, you still need to dig into each company’s details to make sure there’s nothing unusual under the hood. Most of us don’t have time for this.
And that’s perfectly fine. That’s why the iShares Canadian Growth Index ETF (TSX:XCG) exists.
This ETF applies the same metrics I outlined earlier – trailing revenue and earnings growth, projected earnings growth, and more – via the Dow Jones Canada Select Growth Index.
The result is a concentrated portfolio of 35 companies with a paltry dividend yield of just 0.66%. But remember, for growth investors, all that matters is total return. On that front, XCG has delivered, posting an annualized return of 10.6% over the past five years.
What I particularly like about XCG is its diversification beyond the usual Canadian portfolio. Instead of the standard mix of banks, pipelines, and telecoms, XCG gives you exposure to asset managers, tech, railways, garbage disposal, convenience stores, miners, and dollar stores.
The only drawback is the 0.55% management expense ratio (MER), which is on the pricier side. But if you value convenience and want a ready-made basket of growth stocks, it’s a trade-off that’s worth considering.
