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My new dividend portfolio is off to a flying start

Three down, 19 to go.

When I launched my new Yield Hog Dividend Growth Portfolio two weeks ago, I fearlessly predicted that most, if not all, of the 22 securities would continue to raise their dividends, just as they've been doing for years.

Well, I'm pleased to report that my clairvoyant powers haven't let me down yet.

On Monday, two of my stocks, Fortis Inc. (FTS) and A&W Revenue Royalties Income Fund (AW.UN), hiked their dividends – by 6.25 per cent and 2.3 per cent, respectively. A third, Emera Inc. (EMA), announced an 8-per-cent increase in late September.

And we're just getting warmed up. Over the next few months, I expect that several other stocks in the portfolio will raise their dividends.

That's the beauty of dividend growth investing – unlike the erratic ups and downs of the stock market, it's relatively predictable.

Why do I like dividend hikes so much? The first reason is obvious: They put more money in my pocket.

But the second reason is just as important: They send a strong signal about the future. A company that raises its dividend is basically telling you that the outlook for its business is positive.

Consider Fortis. In addition to raising its dividend, the electric and gas utility operator also extended its 6-per-cent annual dividend growth target by a year to 2022, citing its increased five-year capital investment plan of $14.5-billion.

When a utility invests in its operations, its rate base – that is, the value of assets on which it is allowed to earn a regulated rate of return – also increases.

In Fortis's case, the rate base is projected to rise by about 25 per cent over the next five years. That should lead to higher earnings which, in turn, will support the company's projected dividend increases.

These dividend hikes aren't a slam-dunk, mind you. Fortis – which operates in five Canadian provinces, nine U.S. states and three Caribbean countries – said its guidance depends on factors including the continued healthy performance of its utilities, "reasonable outcomes" from regulatory proceedings and successful completion of its five-year capital plan.

But the company, which has made three major U.S. acquisitions in recent years, also said the capital investments consist mostly of "highly executable, low-risk projects" that include improving the transmission grid, increasing natural gas system capacity, replacing aging wooden poles, increasing cybersecurity and allowing the grid to deliver more clean energy.

Given the company's track record, I'm betting Fortis will deliver. This, after all, is a company that has paid higher dividends for 44 consecutive years.

A&W's dividend history isn't nearly as long – A&W Revenue Royalties Income Fund only came into existence in 2002 – but lately it's been serving up some tasty increases as well.

After leaving its distribution unchanged for several years, the fund has increased it five times since the start of 2015 – for a cumulative increase of about 16 per cent.

A&W's increases are being driven by two factors: rising same-store sales at its restaurants, and steady growth in the number of stores in the fund's "royalty pool." (A&W Revenue Royalties doesn't own or operate any restaurants itself; rather, it owns the A&W trademarks, which it licenses to the restaurant operating company, A&W Food Services of Canada, in exchange for a 3-per-cent royalty on sales by restaurants in the pool.)

After a slow start to the year amid economic weakness in Western Canada, A&W announced this week that same-store sales growth accelerated to 3.7 per cent in the third quarter, up from 0.7 per cent in the second quarter and negative 0.3 per cent in the first quarter. The company attributed the sales increase to the launch of natural root beer in July and to A&W's focus on "better ingredients" such as beef raised without added hormones or steroids.

As long as A&W's same-store sales continue to rise – prior to 2017, they had grown for 15 consecutive quarters – I expect we'll see further distribution hikes. The fact that A&W is aiming to expand aggressively also augurs well for investors.

With about 900 restaurants currently, the company is aiming to add more than 200 franchises by the end of 2020, focusing on Ontario, Quebec and Atlantic Canada to complement its larger footprint in Western Canada. As new restaurants are added to the royalty pool annually, the fund's royalty income should grow. (For an explanation of how these restaurant "vend-ins" work, read my column on Pizza Pizza Royalty Corp.)

In a note following the third-quarter results, Laurentian Bank Securities analyst Elizabeth Johnston, who has a "hold" rating on the units, projected that A&W will raise its distribution by 4.7 per cent in 2018 and 2 per cent in 2019.

Here's another nice thing about dividend increases: They are often accompanied by share price gains. On the day the hikes were announced, Fortis rose about 1 per cent and A&W leaped nearly 3 per cent.

Overall, my portfolio has gained more than 2 per cent in its first two weeks. These are early days, but I'm pleased with the performance so far.

Disclosure: John Heinzl personally owns all 22 securities in his Yield Hog model dividend portfolio, including FTS and AW.UN

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