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Here's why Telus and CT REIT belong in my dividend growth portfolio

My Yield Hog Dividend Growth Portfolio is barely six weeks old, but it's already churning out a steady stream of dividend increases.

In late September, utility operator Emera Inc. (EMA) hiked its dividend by 8.1 per cent – in line with its target of 8-per-cent annual growth through 2020.

In October, Fortis Inc. (FTS) and A&W Revenue Royalties Income Fund (AW.UN) announced increases of 6.25 per cent and 2.3 per cent, respectively. Fortis also extended its 6-per-cent annual dividend growth target by a year to 2022, citing a five-year capital spending plan that is expected to drive earnings higher.

The parade of dividend hikes has continued in November, with CT Real Estate Investment Trust (CRT.UN) announcing an increase of 4 per cent and Telus Corp. (T) boosting its payout by 2.5 per cent. That's five increases in six weeks for my portfolio, and over the next few months I'm expecting many more companies to follow suit. (Globe Unlimited subscribers can view the full model portfolio here.)

I like dividend hikes because they put more money in my pocket and – just as important – they're a sign of a healthy, growing business. Today, I'll look at Telus Corp. and CT REIT in more detail and expand on the reasons I included them in my model portfolio.

Telus (T)

Price: $48.35
Yield: 4.2 per cent

I'm not just a Telus investor, I'm also a customer. My family has three cellphones with its Koodo subsidiary, and we've been very happy with the service. So have a lot of other people, judging by Telus's industry-leading wireless "churn" rate of just 0.86 per cent in the third quarter.

Strong customer satisfaction is one reason Telus was able to add 152,000 cellphone, Internet and Telus TV accounts in the latest period – including 115,000 high-value postpaid wireless subscribers that easily beat analyst estimates of 97,000. On top of that, average revenue for every wireless user rose a healthy 3 per cent year over year.

Telus has the wind at its back, analysts say. "In our view, demographics are currently favourable for wireless providers, as immigration, people getting mobile devices at a younger age and more customers now tending to have more than one device are all factors helping the industry," Desjardins Securities analyst Maher Yaghi said in a note in which he reiterated his "buy" rating on Telus and lifted his 12-month price target to $51 from $49.50.

Here's another reason to like Telus: With its fibre-to-the-home rollout expected to be about 50-per-cent complete by early 2018, capital spending is poised to decline next year. That, coupled with lower cash taxes, is expected to add about $220-million to free cash flow (FCF) next year and lower the ratio of dividends to FCF to 90 per cent, down from Mr. Yaghi's previous estimate of 98 per cent, he said.

All of this should help Telus to continue to meet its objective of raising its dividend twice a year at an annual rate of 7 per cent to 10 per cent through 2019. Unless something unforeseen happens, I expect that Telus will raise its dividend again in May, which will make this happy customer an even happier shareholder.

CT REIT (CRT.UN)

Price: $14.30
Yield: 5.1 per cent

CT REIT has raised its distribution four times since it was spun off from Canadian Tire Corp. Ltd. in 2013, and I'm betting there are plenty of annual increases to come.

Thanks to its association with Canadian Tire, CT REIT enjoys reliable cash flows from its portfolio of more than 300 properties, which have an occupancy level of about 99.6 per cent. What's more, the REIT's cash flow is growing steadily, thanks to "vend-ins" of existing stores, new property developments, store expansions and contractual rent increases averaging about 1.5 per cent annually. In its third-quarter earnings release, CT REIT announced four new investments totalling $27-million that add to its existing project pipeline of more than $100-million. The REIT's prudent payout ratio of 76 per cent of adjusted funds from operations provides another layer of comfort.

One often-cited risk with CT REIT is the heavy reliance on one tenant, but the retail chain's entrenched market position, investment-grade credit rating and growing same-store sales provide a high level of security. "The REIT's concentrated tenant profile in fact shields it from the challenges faced by other discretionary goods retailers with varying degrees of creditworthiness," CIBC World Markets analyst Sumayya Hussain said in a note last summer.

CT REIT hasn't escaped the retail downturn completely: One reason its units have been under pressure is that it leases a distribution centre in Calgary to Sears Canada, which is liquidating its assets. The building accounts for about 1.5 per cent of CT REIT's rent, but given its prime location, "a replacement tenant can be easily procured, although the timing lag could temporarily disrupt cash flows," Ms. Hussain said in a note this month. She has a "neutral" rating on the units and a 12- to 18-month price target of $15.50 – in line with the median target of analysts surveyed by Thomson Reuters.

Disclosure: The author also owns shares of EMA, AW.UN, FTS, T and CRT.UN personally.

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