Doughnuts, Coke and pills might be just the thing for investors who are late to the stock market rally.
Tim Horton's, Coca-Cola and Merck are among the 19 stocks that appear on a buy list issued recently by the brokerage firm Edward Jones. The theme linking these stocks is that they offer dividend growth potential, and thus a degree of stability in a bull market that looks to be closer to the end than the beginning.
Dividend stocks have been stellar performers since the stock markets bottomed five years ago and investors probably have unreasonable expectations for them. Dividend stocks can get hammered – that's what happened to the banks in 2009, and what might happen to utilities if interest rates jump. You also run a risk of missing out on companies with the most dynamic growth if you stick only to dividend-payers.
And yet, as Edward Jones documents, there are some clear benefits to dividend growth stocks that look especially good at a time when stocks have already made a big move higher. For example, the firm says that reinvested dividends have contributed more than half of the gains in the S&P/TSX composite total return in the past 30 years. As well, dividend stocks outperformed non-dividend payers in the past 10 years, and dividend growth stocks did even better. If you invested $10,000 from the end of 2003 through the end of 2013, you'd have an annualized loss of 6.4 per cent if you invested in TSX non-dividend payers, a gain of 11.4 per cent if you bought dividend stocks and a gain of 11.8 per cent if you owned dividend payers that raised dividends annually.
An easy way to track dividend growth is to create a Watchlist on Globeinvestor.com and look at the Dividends view, which includes one– and five-year dividend growth rate. To get started in your research, check out the Jones equity buy list of stocks with long-term opportunities for rising income. (The list is on page 3 of this document.) You'll find both Canadian and U.S. stocks on the list, which is timely in that our falling dollar is adding a tailwind to the performance of U.S. assets owned by Canadian investors.
The most recent dividend increases from stocks on the list averaged 13 per cent, and Jones estimates an average gain over the next five years of 9 per cent. Whatever the stock market does over that period, those rising dividends will help your returns.
Rob Carrick