Fewer companies make the Canadian A-list, but Rob Carrick, reporter and columnist for The Globe and Mail, does a checkup and finds dividend growers from several angles.

Canada's dividend elite is breaking up.

Some familiar names can certainly be found on a list of the country's top dividend growers, which are companies that regularly and substantially increase their quarterly cash payouts to shareholders. Canadian National Railway (CNI, Toronto: CNR), Metro (Toronto: MRU-A), SNC-Lavalin Group (Toronto: SNC) and Empire Co. (EMP-A), for example.

But some of the top names of yesteryear are gone, notably each of the Big Six banks. They've been replaced by newcomers, such as:

  • BMTC Group (Toronto: GBT-A), a Montreal-based retailer of furniture, housewares, and electronics;
  • Home Capital Group (Toronto: HCG), parent of Home Trust Co.;
  • and Saputo Inc. (Toronto: SAP), a cheese producer.

With help from Morningstar CPMS, an equity research and portfolio analysis firm, this edition of the Portfolio Strategy column presents several different views on dividend growth.

One includes the Canadian stocks that have increased dividends in each of the past ten years, and another covers 15 stocks that have increased their dividends the most on an average annual basis over the past ten years.

The third list comes out of an exercise conducted by CPMS to test the idea that focusing on dividend-growth stocks is a smart approach for investors. Using data going back to 1992, CPMS created annual portfolios of all TSX-listed stocks that increased their dividend over the previous year.

The annualized return through 2010 was 13.9%, compared to 9.7% for the S&P/TSX composite total return index. Both figures include dividends as well as share price gains.

Another impressive fact about the dividend growers is that they lost money as a group only twice in the past 19 years. The composite total return index was down six times over that same period.

CPMS senior consultant Jamie Hynes said the outperformance of the dividend growers can be explained by the fact that only well-run companies can afford to consistently increase payouts to shareholders, while also building the business.

"It comes down to the fact that these are good quality companies," he said.

The CPMS Dividend Growers strategy isn't practical for the individual investor. Dozens of buy and sell trades would be needed to set up the portfolio each year, and these would eat into returns.

A more practical option would be to look at the list provided here of the stocks that have been included in the CPMS Dividend Growers portfolio the longest. SNC-Lavalin was added at the end of 1993 and has been included ever since. Fortis (Toronto: FTS) is the oldest member, dating back to the end of 1991.

One of the most interesting stories you'll find in all the lists of current dividend growers is in the stocks that do not appear. Before the financial crisis began in 2007, the Big Six banks were commonly found on lists of the top dividend stocks.

Today, the only bank you'll find on any of the three dividend growth lists presented here is Canadian Western Bank (Toronto: CWB), which has increased its dividend by an annual average of 17.9% over the past ten years.

Several of the big banks have just started to resume dividend increases again, after a break of almost three years. But there are still many one-time members of the dividend elite that have yet to start increasing payouts again.

Tom Connolly, who for 30 years has been writing a newsletter on dividend growth stocks called The Connolly Report, said he's willing to cut these companies some slack. In fact, he personally owns the shares of three companies that haven't raised dividends in a while: Loblaw (Toronto: L), Power Financial (Toronto: PWF), and Sun Life Financial (SLF).

"Here I am, 30 years writing this investment letter, and three of the stocks I own in my own portfolio aren't growing their dividends," Connolly said.

Why so sanguine about dividend growth stocks that aren't growing their dividends right now? His explanation is rooted in his yield on cost, which is a term that documents one of the key benefits of dividend growth stocks.

As a company increases its dividends over the years, it boosts the yield that shareholders get from the money they invested. If you buy a $10 stock with a 20-cent annual dividend, your initial yield is 2%. If the company raises its dividend to 60 cents over a period of time, your yield on the $10 cost of your shares rises to 6%.

"Most of the stocks I have I bought years ago," Connolly said. "If dividend growth stops, I'm still getting a high yield on cost."

The power of a rising yield on cost is well documented by CPMS's list of the stocks that have been included in its Dividend Growers portfolio the longest. Remember, that's the annual list the firm creates of stocks that increased their dividends the previous year.

Take SNC-Lavalin, for example. CPMS added it to the portfolio at the end of 1993 at a split-adjusted cost of $2.08. So, the yield on cost was 32.7% at the end of last year. SNC has already clocked in with another dividend increase in 2011, so the up-to-date yield on cost is 40.4%.

Some of the banks may be cranking up their dividends again, but the overall trend in Canada for dividend growth is disappointing.

The 2011 version of CPMS's Dividend Growers portfolio includes the shares of 48 companies that increased dividends the previous year. That's down from 53 in 2010 and 65 in 2009. Back in 2006, before the financial crisis, there were 74 dividend growth stocks in the portfolio.

If the menu of dividend-growth companies is getting smaller, there's at least a core of stocks that keep on delivering. SNC-Lavalin stands out in this group, although it's not immune from Connolly's criticism.

"It's a terrific company," he said, "but it's never cheap."

NEXT: The Picks

Dividend Growth Stars of Today, Part One

Here's a list of the TSX-listed stocks that have increased their dividends at least once per year over the past decade. The stocks are listed from highest ten-year dividend growth rate on down.

Company Ticker (TSX) Annual Dividend ($) Share Price ($) Yield (%) 5-yr Ann. Div. Growth (%) 10-yr Ann. Div. Growth (%)
Home Capital Group HCG 0.72 52.36 1.4 26.75 34.14
BMTC Group GBT-A 0.24 19.83 1.2 24.58 28.81
Saputo SAP 0.64 44.79 1.4 13.20 25.36
SNC-Lavalin Group SNC 0.84 54.62 1.5 28.47 23.86
AGF Management AGF-B 1.04 18.44 5.6 11.25 19.06
Empire Company EMP-A 0.80 53.97 1.5 7.26 18.12
Canadian National Railway CNR 1.30 74.40 1.7 13.75 16.56
Metro MRU-A 0.77 47.29 1.6 12.02 16.14
Ensign Energy Services ESI 0.38 17.80 2.1 8.21 15.34
Toromont Industries TIH 0.64 18.68 3.4 12.22 14.51
Enbridge ENB 0.98 30.68 3.2 10.13 10.34
Fortis FTS 1.16 31.64 3.6 13.89 9.31
Atco ACO-X 1.14 61.15 1.9 6.75 8.71
TransCanada TRP 1.68 42.29 4.0 5.66 7.18
Cdn. Utilities CU 1.61 55.90 2.9 6.85 5.31
Imperial Oil IMO 0.44 43.69 1.0 7.36 5.16

Dividend Growth Stars of Today, Part Two

These TSX-listed companies have the highest dividend growth rates over the past ten years, but some may not have raised dividends annually. Companies that cut dividends in the past decade are omitted.

Company Ticker (TSX) Annual Dividend ($) Share Price ($) Yield (%) 10-yr Div. Growth (%)
Shaw Communications SJR-B 0.92 20.60 4.4 43.96
Home Capital Group HCG 0.72 52.36 1.4 34.14
Veresen VSN 1.00 13.91 7.1 29.56
Industrial Alliance IAG 0.98 40.61 2.4 29.31
BMTC Group GBT-A 0.24 19.83 1.2 28.81
Sun Life Financial SLF 1.44 28.24 5.1 28.21
Saputo SAP 0.64 44.79 1.4 25.36
SNC-Lavalin Group SNC 0.84 54.62 1.5 23.86
Reitmans RET-A 0.80 15.00 5.3 22.80
Le Chateau Inc. CTU-A 0.70 8.65 8.0 21.48
Arbor Memorial Svcs ABO-B 0.44 24.60 1.8 20.18
AGF Management AGF-B 1.04 18.44 5.6 19.06
Empire Company EMP-A 0.80 53.97 1.5 18.12
Canadian Western Bank CWB 0.56 30.00 1.9 17.87
Suncor Energy SU 0.44 37.29 1.2 16.75

Dividend Growth Stars of Today, Part Three

To test the value of investing in dividend growth stocks, the portfolio analysis firm Morningstar CPMS has since 1992 created annual compilations of TSX-listed stocks that have raised their dividends in the previous year. Here are the stocks that have held their place on the list of dividend growers the longest.

Company Ticker (TSX) Purchased Purchase Price ($) Current Yield (%) Yield on Cost (as of Dec. 31) (%)
Fortis FTS 12/31/1991 5.97 3.6 19.4
Canadian Utilities CU 12/31/1992 10.25 2.9 14.7
SNC-Lavalin Group SNC 12/31/1993 2.08 1.5 32.7
Atco ACO.X 12/30/1994 7.50 1.9 14.1
Imperial Oil IMO 12/30/1994 5.14 1.0 8.6
Emera EMA 12/29/1995 12.38 4.1 10.5
Empire Company EMP.A 12/29/1995 6.50 1.5 12.3
Metro MRU.A 12/29/1995 4.66 1.6 14.6
Toromont Industries TIH 12/29/1995 3.69 3.4 17.3
Canadian National Railway CNR 12/31/1996 8.68 1.7 12.4
Enbridge ENB 12/31/1996 9.99 3.2 19.6
AGF Management AGF.B 12/31/1997 9.16 5.6 11.4
Saputo SAP 12/31/1998 10.80 1.4 5.9
Ensign Energy Services ESI 12/29/2000 9.25 2.1 4.1
Canadian Natural Resources CNQ 12/31/2001 4.79 0.9 6.3
CCL Industries CCL.B 12/31/2002 19.46 2.2 3.6
Finning International FTT 12/31/2002 12.77 1.8 3.8
Suncor Energy SU 12/31/2002 12.35 1.2 3.2
Transcontinental TCL.A 12/31/2002 18.50 3.7 2.4
TransCanada TRP 12/31/2002 12.92 4.0 7.0
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