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, Metro Inc., SNC-Lavalin Group and Empire Co., 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 They've been replaced by newcomers such as BMTC Group, a Montreal-based retailer of furniture, housewares and electronics; Home Capital Group, parent of Home Trust Co.; and Saputo Inc., 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 10 years, and another covers 15 stocks that have increased their dividends the most on an average annual basis over the past 10 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 per cent, compared to 9.7 per cent 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 Inc. 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, which has increased its dividend by an annual average of 17.9 per cent over the past 10 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 onetime 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 Cos., Power Financial and Sun Life Financial.
"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," Mr. 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.