Best Stocks In Canada: By Sector, Industry & Market Cap

There are a lot of stocks, ETFs, and mutual funds trading in Canada. It can be overwhelming to find what to buy.

When investing in individual companies by buying their stocks or shares, there is a straightforward approach to buying the best Canadian stocks. You want to approach it systematically to narrow down what you are looking at.

You start with filtering the stocks by sector and then by industry. It’s the best approach as it allows you to navigate through fewer stocks. This systematic approach allows you to keep the list small and compare stocks within the same sector and industry rather than being across everything.

Focusing on Mid to Large Market Cap Stocks

Let me show you what the best 5 stocks by market capitalization are based on the following market capitalization grouping. You can read more details on what market cap means to risk in a more detailed post. Stability and moat are critical here. Innovative solutions can be profitable but they often can be copied. As such, smaller companies with growth are interesting but not without higher risks.

• Mega Cap: These companies dominate their industry and often have very little competition. Their challenges are often around becoming too much of a monopoly and regulators stepping in.
• Large Cap: These companies are very mature and usually have a moat. There is competition but it is limited to a small number of companies.
• Mid Cap: These companies have grown and are focused on dominating their business. At this level, you get a higher level of safety compared to the smaller companies.
• Small Cap: These companies are in the growth business life cycle and have potential to grow more or be acquired. There are still risks and your money could go sideways at times but you could have higher returns.
• Micro Cap: These companie have usually struggle to grow at the expected pace. Still in the start-up phase to some extent working to get in the growth phase. There is potential but it's also risky.
• Nano Cap: These companies fall into the penny stocks category. These companies have the highest risk with the potential for some high reward.

For the remaining selection of stocks, the focus is going to be on mid to large-market cap stocks. There aren’t any mega market cap stocks in Canada by the way.

Summary by Sectors & Industries

Here is the breakdown of major Canadian dividend stocks by sectors and industries to be covered. Remember, we are focused on the mid to large-market cap stocks.

Methodology for the Best Stocks in Canada

The approach here is towards stability of the business with good total return. This is not about building a dividend income for retirement but about total returns, including dividends.

The retirement portfolio is another option for a long-lasting dividend income portfolio. For example, the model portfolio is built exclusively with large-cap stocks. My portfolio has just around 20 stocks, all large-cap stocks.

The goal of showing the best five stocks by market cap is to help understand what exists in each group, as each group comes with an investment risk. It will help show how to balance your risk vs return strategy.

One caveat to the selection process is that I will exclude oil and gas stocks and mining stocks. Unfortunately, these companies are too impacted by commodity prices to have enough stability.

Below is a table that will show you at a high level the composition of the stocks on the TSX.

The ratio of dividend-paying stocks to non-dividend-paying stocks is an important part of the risk factor, as the ability to pay a dividend consistently implies revenue stability.

The ability to grow the dividend annually shows not only the ability to have consistent and stable revenue but also a growing revenue. Getting dividend income in the retirement years, it’s important to have dividend growth; otherwise, you lose to inflation.

Did you see the pattern in the number of stocks paying a dividend? The larger the company, the more it tends to pay a dividend.

Note that you need access to specialized dividend data to screen dividend stocks. You should consider a screener such as Dividend Snapshot Screeners.

Best 5 Canadian Mega Cap Stocks

There are no mega-cap stocks in Canada. While I hold many of them in my portfolio, they are all U.S. mega-cap stocks.

They are also my best-performing stocks. If you aren’t ready to deal with the currency exchange, buy the best S&P 500 ETF. 

Another option is the NASDAQ 100 with XQQ, but know that 90% of the NASDAQ 100 is included in the S&P500. The NASDAQ 100 is more volatile, and your blood pressure may be impacted ;)

Best 5 Canadian Large Cap Stocks

This group includes most of the TSX blue-chip stocks, which tend to be oligopoly. These Canadian stocks are more stable but generally have moderate growth.

Of the five picks below, only one has a good dividend yield for a dividend-focused investor. The other picks are focused on dividend growth. None have a dividend yield above 4%, but they have excellent dividend growth.

Not a place for energy dividend stocks here sadly. There are better options to start with.

Why not BCE or ENB? 

It’s because they are not growth stocks. They strive as income stocks and not as long-term investments to build wealth. While you may feel safe with those stocks in your portfolio, you leave money on the table unless you leverage covered calls for more income.

While they have a juicy yield that is attractive for many investors (newbies and retirees alike), those stocks provide stability. Still, over the years, it’s mainly about the compounded growth of the dividends.

The first graph shows poor stock price appreciation over five years, while the second graph shows the impact of the dividend reinvested.

Why not SHOP? 

I would have included it a while back but today, I am not sure about its growth vector on the business front. The pandemic provided a boost due to behavioural change, but is that sustainable growth?

Why not the big 5 banks?

Let’s be clear: Most Canadians own the Big 5 banks, whether through a fund, an index ETF, or by holding one or more individually. However, not all of them perform the same.

The best Canadian banks are TD and RY, while the others attempt growth outside of Canada with little success.

In some cases, HCAL might be better than any individual bank. HCAL is based on an active investment strategy that rebalances quarterly based on the underperforming banks.

What about other blue-chip stocks?

Many of the other blue chip stocks in this category can have a place in your portfolio. Based on your goals for growth, or income, and your diversification approach, you should be able to find options.

Best 4 Canadian Mid-Cap Stocks

This market cap segment is where you find up-and-coming future large-cap stocks. Alimentation Couche-Tard, and Intact Financial were once part of this group.

Why not CJT?

The stock was challenged during the early Covid-19 pandemic. It’s not enough of a consistent business, and climate change might put pressure on them.

I’d like to pick stocks my kids could own for 30 years, but I don’t think it’s one of them.

Best 5 Canadian Small Cap Stocks

This group of stocks is interesting as this is where most of the REITs are. Yet, I am not a fan of REITs as you may have read.

Let’s be clear about this category: these are small-cap stocks and, therefore, have more risks than large-cap stocks. I cannot say that the risk vs reward is worth it with this group of stocks.

• Absolute Software
• Calian Group Ltd
• WELL Health Technologies Corp
• Canaccord Genuity Group
• Uni-Select

Best 5 Canadian Micro Cap Stocks

This group of companies is either targeted for acquisition or growing by expanding.

However, this is also a risky investment group. It should represent a small part of your portfolio. When the risk is discussed, equity is often highlighted as the highest risk, but you should now see the difference between a large-cap stock and a micro-cap stock.

33% of the stocks in this group have no 5-year return yet, while another 33% have a negative return over the last five years. That leaves only another 33% with a positive return to select from.

While I was hoping to see candidates I would consider, I could not settle on any stock with any degree of confidence.

Best Canadian Nano Cap Stocks

We are going to skip this market cap group as, technically, this is now entering the high speculation area of investing.

That’s a much different investment strategy.

Best Dividend Stocks by Accounts

Now we make this more complex a little to figure out the best stock to hold in various accounts. The best RRSP investments aren’t always what we think they should be. Again, you need to focus on accumulation and decumulation.

The best TFSA investments are similar. The only big difference is to consider the US withholding tax from US dividend stocks. Otherwise, you can hold the same stocks.

My Portfolio By Market Cap

I have built a portfolio that delivers around 12% annualized returns (a.k.a. Annual ROR) and has made my fair share of mistakes.

My leanings have been to keep it simple. Canada doesn’t have a lot of great options in the end. Canada has a TSX 60 while the US has the S&P 500 for example. The numbers just show you how many great companies you can find.

Don’t forget about your income tax. You don’t want to realize too late that you need to change your investment strategy for better tax efficiency. There is a way to be tax efficient in Canada.