A stock with a growing dividend is the investment of a lifetime.
Own the shares of a company that regularly increases its dividends and you put yourself in a position to receive an ever-growing flow of income and benefit from a rising share price. The total return possibilities over a long period of time are just amazing.
Here's an example using Bank of Nova Scotia, which figures prominently in some analyses of top dividend-growth stocks produced by the Globeinvestor.com people. Even after five years, the impact of dividend growth is major.
Imagine you bought Scotiabank shares in early December, 1998, when they traded around $17 (adjusted for stock splits) and offered an 84-cent annual dividend. Your dividend yield then would have been about 4.9 per cent; now, with the annual dividend up almost 43 per cent to $1.20, the yield on the money you invested originally would be 7 per cent.
Oh, and while you collected those steadily rising dividends, Scotiabank's share price was rising to a current level around $39. That's no surprise because dividend growth stocks tend to be the kind that are never out of favour with investors for long.
Dividend growth is one of those tried-and-true investing strategies that get highlighted every now and again. This week, strategists at Lehman Brothers issued a note advising investors to seek companies with rising dividend payouts as opposed to stocks with a high dividend yield. George Vasic, strategist at UBS Canada, recommended much the same approach in a report last year, while Tom Connolly of Kingston, Ont., has since 1981 published a newsletter based on the strategy of dividend growth.
As the Lehman people emphasized, the key here is dividend growth and not a high dividend yield. One reason is that a high dividend yield is a sign of investor concern that a company may not be able to sustain its high payout.
That's the case right now with the electrical utility TransAlta Corp., which yields an exceptionally high 6.06 per cent. The story here is that investors who are worried about a dividend cut have bid TransAlta's share price down. A lower share price and a stable dividend produce a higher yield.
The other reason to favour dividend growth over a higher yield is the potential to pull in more dividends over the long term. You can see this principle at work in the Scotiabank example above. Over a period of five years, the dividend yield on those shares rose well above what you'd typically get from an established dividend stock listed on the Toronto Stock Exchange.
Now, which are the stocks with the best record of dividend growth? To find out, Globeinvestor.com analyst Pierre Javad screened TSX-listed stocks to find the 50 with the highest level of dividend growth over the past five-, three- and one-year periods. Let's take a look at stocks that appeared on all three lists, which suggests a consistent level of dividend growth.
As you'd expect, the banks are prominent on the list of stocks that have regularly bumped up their dividends. In fact, the dividend growth rate at some of the banks has been rising in recent years. Take Canadian Imperial Bank of Commerce, for example. Its five-year growth rate is 14.9 per cent, but its three- and one-year rates are 23 per cent and 46.3 per cent, respectively. You'll find that dividend-growth momentum at the banks ebbs and flows along with the economic cycle, but dividend cuts are unheard of and years without any increase at all are very rare.
Mutual fund companies also show up on the list of dividend-growth all-stars. CI Fund Management has been a dividend machine, but AGF Management has delivered strong, steady increases as well. IGM Financial, parent of Investors Group, did not show up on the list of the top dividend growers of the past year, but it nevertheless has a good five-year growth rate of 23.7 per cent.
Another way to tap into the IGM dividend-growth engine is through parent company Power Financial Corp., which also controls Great-West Lifeco, another stalwart in the dividend-growth rankings. Power Financial is a rock-steady dividend grower, with increases that regularly clock in somewhere in the range of 20 to 30 per cent.
You'll notice that many stocks that score well on dividend growth don't have strikingly attractive yields right now. Power Financial yields about 2.4 per cent, while Scotiabank yields almost 3.1 per cent, Great-West about 2.8 per cent and CI about 3.8 per cent.
The most extreme example of a low-yielding, high-growth dividend stock is Loblaw Cos., which now has a dividend yield of 1.15 per cent. You may be surprised to find out that Loblaw has increased its dividend by a compound average annual 30.6 per cent over the past five years, seventh-highest on the list over that time frame. Why isn't the yield higher, given this record of dividend increases? Blame the high share price -- around $66 -- and the tendency for Loblaw shares to post steady price gains year by year.
While large-capitalization stocks like the banks and Loblaw dominate the lists of top dividend growers, there's a selection of smaller-cap stocks as well. Cheese producer Saputo Inc. has consistently raised its dividend by a substantial amount, as has clothing retailer Reitmans (Canada) Ltd. and food retailer Metro Inc. The dividend-growth strategy can be applied to income trusts as well as stocks, but the results aren't nearly as striking. Trusts tend to be mature, low-growth enterprises that already pay out most of their income to unitholders. As a result, distribution increases tend to be quite small.
Screening by Globeinvestor.com shows that the trusts with consistent distribution increases over the past five years include Freehold Royalty Trust at 19.3 per cent, Cominar Real Estate Investment Trust at 15.9 per cent, Shiningbank Energy Income Fund at 14.1 per cent and Superior Plus Income Fund at 12.2 per cent. Bear in mind that with income trusts it's more important to be certain of stable distributions than it is to seek the potential for distribution increases.
For income-oriented investors, stocks that increase their dividends are attractive because they create a rising dividend flow that can offset inflation. In fact, dividend-growth stocks can be a far more powerful, and riskier, engine of income growth than products such as escalating-rate guaranteed investment certificates and Canada Premium Bonds, which are a sister product of regular Canada Savings Bonds.
People investing for growth can take their dividends and deploy them elsewhere in their portfolios. Or, they can try setting up a dividend reinvestment plan where a company takes your dividends each quarter and uses them to buy new shares, usually at no cost. As the dividend rises over time, you're able to purchase more new shares.
The pool of top dividend-growth companies don't offer much exposure to key sectors like resources, industrials and technology, so you'll need to look elsewhere to properly balance the equities in your portfolio. As a portfolio core, though, dividend growers are solid. You'll spend a lifetime congratulating yourself for buying them.
It's all about growth
Investors often focus on the size of the yield when choosing which dividend-paying stocks to buy. But an effective strategy is to look at how much a company has been able to boost that dividend. The following tables rank stocks in the S&P/TSX composite by dividend growth rates over one-, three- and five-year time frames.
1-YEAR
Shaw Communications: 300.00%
Harris Steel Group: 300.00%
CHC Helicopter: 150.00%
Russel Metals: 114.29%
Amisco Industries: 100.00%
Riverside Forest Products: 100.00%
Logistec Corp.: 92.50%
Goodfellow Inc.: 88.89%
TSX Group: 83.33%
Reitmans (Canada): 80.00%
3-YEAR
CI Fund Management: 171.44%
Sun Life Financial: 94.28%
Industrial Alliance Insurance: 71.75%
Akita Drilling: 71.00%
CHC Helicopter: 65.65%
Russel Metals: 61.29%
Shaw Communications: 58.74%
Harris Steel Group: 58.74%
Saputo Inc.: 49.38%
Seamark Asset Mgmt.: 47.36%
5-YEAR
CI Fund Management: 82.06%
Magna International: 47.19%
Shaw Communications: 38.67%
Saputo Inc.: 37.97%
Seamark Asset Mgmt.: 36.85%
Harris Steel Group: 31.95%
Loblaw Companies: 30.60%
Great-West Lifeco: 30.26%
George Weston Ltd.: 29.20%
Empire Co.: 28.69%
SOURCE: LIBRARY.COM AND FUNDATA
More on the web
For a longer, comprehensive and printable list of the 50 fastest-growing dividend plays, read this story on-line at http://www.theglobeandmail.com/business.
© The Globe and Mail
Only GlobeinvestorGOLD combines the strength of powerful investing tools with the insight of The Globe and Mail.
Discover a wealth of investment information and and exclusive features.
