Dividend growth: What investors need to know

Dividend growth: What investors need to know

It’s a positive indicator for sure, but it’s no guarantee


My family’s vegetable garden is producing a bounty of cucumbers, beans and zucchini these days. We’re now faced with the happy problem of figuring out what to do with all the produce.

It’s amazing how fast plants grow in just a few months.  If only stocks grew as quickly.

Dividend investors are particularly fond of companies that grow their dividends.  If you talk to old hands, you’ll probably hear about stocks they bought years ago that now pay giant dividends.  But you can’t blame them.  After all, there’s something special about owing a stock that pays more in dividends than it cost in the first place.

While dividend growth is vitally important to returns over the long term, it’s also a positive indicator in the short term.  That’s because companies have a tendency to boost their dividends when their prospects are good.  They hold off on increases when the outlook is poor.  (As with most rules of thumb, this one definitely has its exceptions.)

I generally favour stocks that have increased their dividends over the last year or last five years.

I’m happy to say that the vast majority of this week’s Safer Canadian Dogs—shown in the table below—have grown their dividends over the last year.

Of the bunch, the top dividend grower this year was Telus which boosted its payments to shareholders by 12%.  National Bank wasn’t far behind with a 10% increase.

The next best growers were Shaw, BCE, the Bank of Montreal and Rogers, which sported dividend increases between 5% and 10% over the last 12 months.

Trailing behind, CIBC grew its dividend by 4% and Fortis’ dividend climbed by 3%.

The top yielder this week, Canadian Oil Sands, merely maintained its dividend over the last year.  Alas, a dividend increase seems unlikely from this one, in the short term, unless oil prices shoot up.

Potash Corp. of Saskatchewan also failed to grow its dividend this year.  But that shouldn’t come as a big surprise because the fertilizer giant’s earnings have eroded over the last few years.  Mind you, the worrisome earnings trend didn’t stop the firm from boosting its dividend just over a year ago.

While recent dividend growth is a good sign, it isn’t a guarantee of success.  After all, most companies have a hard time predicting the future, just like the rest of us.

Consider the case of iconic motorcycle-maker Harley-Davidson (HOG).  The U.S. company grew its dividend with some regularity right into 2008.  Alas, the economy stumbled and, just a year later, the firm chopped its dividend to less than one-third of what it paid before the crash.

But, over the long-term, most dividend growth stocks do quite well.  (Even Harley-Davidson roared back from its lows and analysts expect the firm’s dividend to reach new highs over the next few years.)  Hopefully our Canadian dividend stocks will do even better.

Safer Canadian Dogs

Investors following the Dogs of the Dow strategy want to buy the 10 highest yielding stocks in the Dow Jones Industrial Average (DJIA), hold them for a year, and then move into the new list of top yielders.

The Dogs of the TSX works the same way but swaps the DJIA for the S&P/TSX 60, which contains 60 of the largest stocks in Canada.

My safer variant of the Dogs of the TSX tracks the 10 stocks in the index with the highest dividend yields provided they also pass a series of safety tests, such as earning more than they pay in dividends. The idea is to weed out companies that might cut their dividends in the near term. Just be warned, it’s a task that’s easier said than done.

Here’s the updated Safer Dogs of the TSX, representing the top yielders as of Aug. 18. The list is a good starting point for those who want to put some money to work this week.  Just keep in mind, the idea is to hold the stocks for at least a year after purchase—barring some calamity.

Name Price P/B P/E Earnings Yield Dividend Yield
CANADIAN OIL SANDS (COS) $23.00 2.33 14.2 7.04% 6.09%
BCE (BCE) $48.21 3.35 18.19 5.50% 5.12%
ROGERS (RCI.B) $43.18 4.34 14.84 6.74% 4.24%
SHAW (SJR.B) $27.17 2.7 16.17 6.18% 4.05%
POTASH (POT) $38.48 3.34 21.85 4.58% 3.97%
TELUS (T) $38.48 2.9 17.03 5.87% 3.95%
NATIONAL BANK (NA) $48.80 2 11.24 8.89% 3.93%
CIBC (CM) $101.76 2.42 13.01 7.68% 3.93%
BANK OF MONTREAL (BMO) $80.37 1.75 12.36 8.09% 3.88%
FORTIS (FTS) $33.61 1.48 21.14 4.73% 3.81%


Source: Bloomberg, Aug. 18

Price: Closing price per share

P/B: Price to Book Value Ratio

P/E: Price to Earnings Ratio

Earnings Yield: Earnings divided by Price, expressed as a percentage

Dividend Yield: Expected-Annual-Dividend divided by Price, expressed as a percentage

As always, do your due diligence before buying any stock, including those featured here. Make sure its situation hasn’t changed in some important way, read the latest press releases and regulatory filings and take special care with stocks that trade infrequently.  Remember, stocks can be risky.  So, be careful out there. (Norm may own shares of some, or all, of the stocks mentioned here.)

New & Noteworthy

The Mystery of Lofty Stock Market Elevations

Yale professor Robert Shiller measures the market using his cyclically-adjusted price-to-earnings ratio.  These days the ratio is sky high, which doesn’t bode well for stocks.  As a result, investors should lower their return expectations.

Just For Frugal Fun

The Victory Garden

If you’ve got a green thumb, you’re probably enjoying a harvest of vegetables from your garden right now.  But I’ve always been dubious about gardening as a money saver.  Once you factor in the time and money that goes into a vegetable patch, you’ll probably discover it’s cheaper to buy your produce instead of growing it.  On the other hand, gardening is a relaxing pastime that provides tasty rewards that can make it well worth doing.

Norm Rothery, CFA, PhD, is the founder of StingyInvestor.com