The Globe and Mail

Companies don’t take dividend increases lightly. In most cases, investors interpret a dividend hike as a commitment to pay the higher dividend not just in the current quarter, but in subsequent quarters as well. Companies wouldn’t be raising dividends unless they felt confident in their ability to maintain them.

“The last thing a company wants to do is raise it and have to cut it back,” said George Vasic, strategist at UBS Securities Canada Inc. “It doesn’t tend to sit well with investors. You’re better off to not raise it than to raise it and then cut it back to the original level, because investors will flee to other stocks if you do that.”

In contrast to the stretched finances of consumers and governments, corporate fundamentals have rarely been stronger, Mr. Vasic said. Many companies slashed costs during the recession and are emerging with low debt-to-equity ratios, ample cash reserves and growing profits to support higher dividend payments.

Mr. Vasic expects S&P/TSX composite index companies to collectively earn $800 a share in 2010, up 26 per cent from $635 in 2009.

When putting together a portfolio of dividend growth stocks, he says it’s important to diversify across industries. “Utilities may have better yields but lower growth, and you want to mix that up with companies like CN Rail, which has a lower yield but a stronger dividend growth record.”

CN Rail has raised its dividend every year since going public in 1995, including a 6.9-per-cent increase in January.

“When you look at corporate balance sheets, they’re very, very strong,” said Ric Palombi, portfolio manager with McLean & Partners Wealth Management in Calgary.

“Companies that are raising their dividends are saying they’re confident that they can maintain or even increase their free cash flow. They see stability or growth in their business and that’s a shot in the arm for different parts of the economy.”

The dividend growth club

A dividend increase signals confidence about the future. Here’s a sample of recent dividend hikes.