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- (Fred Lum/The Globe and Mail)
- (Fred Lum/The Globe and Mail)

YIELD HOG

Canadian Utilities’ dividend keeps powering higher Add to ...

John Heinzl is the dividend investor for Globe Investor’s Strategy Lab. Follow his contributions here. You can see his model portfolio here.

As I’ve said many times, one of best things about dividend investing is that it’s predictable.

Case in point: Canadian Utilities Ltd.

In a column two weeks ago, I identified the Calgary-based company – which owns gas and electric utilities, pipelines and other energy assets – as one of five stocks that would raise its dividend early in 2014.

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I’m pleased to report that it did not disappoint. The day after the column appeared, the company raised its quarterly dividend by about 10 per cent.

I would love to say that I have some special forecasting powers, but my dog could have seen this coming. Canadian Utilities has raised its dividend every January (and sometimes more often) for more than two decades. With its business growing steadily, there was no reason to expect it to stop now. The only question was how big the increase would be.

A 10-per-cent bump is nice. But it’s when you put consecutive increases together that you really see the power of dividend growth in action.

Since I selected Canadian Utilities for my Strategy Lab model dividend portfolio in September, 2012, it has raised its dividend twice. The quarterly dividend is now 21-per-cent higher than it was just 16 months ago.

I also own the stock personally, and since I purchased it about four years ago the dividend has climbed 52 per cent. What’s more, the shares – which split two-for-one in June, 2013 – have risen about 68 per cent. I consider the capital gains a bonus: My primary goal with dividend growth stocks such as Canadian Utilities is to build a conservative portfolio that generates rising cash flow to supplement my other sources of income in retirement.

As long as revenue and profit are growing, I fully expect my stocks to rise in price over the long run. But I’m well aware that markets can be volatile in the short run, which is why I focus on dividends: They’re predictable.

With that in mind, today I’m reinvesting the cash in my Strategy Lab model dividend portfolio to purchase an additional 20 shares of Canadian Utilities, bringing the total to 140. Compounding is an investor’s best friend, and in my personal portfolio I also regularly reinvest dividends.

Now, some people might scoff at Canadian Utilities’ 2.9-per-cent yield as being too small. But focusing on the current yield alone misses the big picture.

“To me there are two ways of looking at dividend growth stocks. Some pay a relatively high dividend but then only increase their dividend payments modestly. Others pay dividends at a lower yield but increase their payments at a much higher rate,” says Bob Cable, a senior wealth adviser with ScotiaMcLeod.

“If your goal is simply current income, look elsewhere. But if your goal is rising income and what that income might be a decade from now, Canadian Utilities is certainly one excellent candidate,” says Mr. Cable, who owns the stock both personally and in client accounts.

He adds that Canadian Utilities’ dividend should be very safe given that the payout ratio is a conservative 38 per cent of estimated free cash flow in 2014.

A company can’t create dividend growth out of nothing, of course. It has to have the rising profit to make the dividend hikes possible. In Canadian Utilities’ case, there is plenty of growth to support the rising payout.

For example, the company is investing more than $6-billion in new electricity transmission infrastructure projects in Alberta from 2013 to 2015. It has also been expanding in Australia and northern Canada, and is looking to grow in the green energy space. In the third quarter, the company’s utility earnings nearly doubled, and there is more growth ahead.

No stock is bulletproof. If bond yields rise, Canadian Utilities and other interest-sensitive stocks could take a hit. But I’m prepared to live with that risk, given the rising income the stock will almost certainly throw off for many years to come.

 

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