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Investment Ideas These two TSX stocks just hiked their dividend payouts - and for good reason

Now that temperatures are falling and the leaves are turning colour, my thoughts naturally turn to … dividend increases.

I don’t know if it’s because Christmas is coming, but fall is a time of year when many companies decide to share their good fortune with investors.

Dividend increases are great for a couple of reasons. First, they give you more cash. Second, and less obvious, a dividend increase signals that the company is performing well and is confident that it can sustain the dividend at the new, higher level.

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Dividend cuts do happen occasionally. But most companies will be reluctant to raise their dividend if they think there is a chance they will later have to reduce it. Dividend cuts destroy investor confidence and are a recipe for a badly performing stock price.

Dividend increases that are supported by a company’s growing cash flow, on the other hand, are a bullish sign. Today, we’ll look at two companies that just raised their dividends – and will likely continue to do so. (Disclosure: I own both of these stocks personally and in my model Yield Hog Dividend Growth Portfolio. View it online at tgam.ca/dividendportfolio.)

A&W Revenue Royalties Income Fund (AW.UN)

Price: $35.23

Yield: 4.9 per cent

I’ve been banging the table about A&W for a couple of years now. The chain makes great burgers, fries and onion rings and, for the past several years, it’s been serving up something just as delicious for investors: steady sales and distribution increases.

Third-quarter results announced on Oct. 17 were nothing short of spectacular. In a fast-food industry where chains are thrilled with low single-digit increases, A&W posted a 13-per-cent jump in same-store sales (a measure that strips out the impact of new-store openings). To provide some context, that crushed same-store sales growth of 4.2 per cent that rival burger chain McDonald’s Corp. announced on Tuesday.

In light of A&W’s strong results, the company hiked its monthly distribution by 1.4 per cent to an annualized $1.72 a share – good for a yield of 4.9 per cent. It was A&W’s third distribution hike this year and there are almost certainly more increases on the menu.

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Elizabeth Johnston of Laurentian Bank Securities, the only analyst who follows A&W, expects the company to boost its distribution by a total of 3 per cent in each of 2019 and 2020. Ms. Johnston raised her target price on the shares to $36 from $34.50, but maintained her hold rating. The shares closed Tuesday at $35.23 on the Toronto Stock Exchange.

What’s driving A&W’s sales? The popularity of new and promotional menu items, such as the Beyond Meat Burger and Wild-Caught Cod Burger, is providing a nice tailwind. Price increases are also a factor, as are partnerships with third-party food delivery apps such as Uber Eats.

Not only are A&W’s same-store sales rising – they’ve increased for 21 of the past 22 quarters – but the Vancouver-based chain is also expanding aggressively, particularly in Ontario and Quebec where its urban restaurants have been among the chain’s top performers.

With restaurant royalty funds such as A&W – which licenses the chain’s trademarks to the operating company in exchange for a royalty based on a percentage of sales – the key driver of distribution growth is same-store sales. But new restaurants also help, and A&W’s expansion ensures a steady supply of new restaurants will be added to its royalty pool.

(While we’re still on the topic of burgers, I should note that McDonald’s increased its dividend by 15 per cent on Tuesday. Its same-store sales may have paled next to A&W’s, but they were still solid.)

Fortis Inc. (FTS)

Price: $42.79

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Yield: 4.2 per cent

When I wrote about Fortis a month ago, I indicated that a dividend increase could be coming at its Investor Day on Oct. 15. The company did not let me down: Not only did the utility operator hike its dividend by 5.9 per cent, but it extended its 6-per-cent annual dividend growth target by a year through 2023.

The St. John’s-based company also unveiled an updated five-year capital investment plan of $17.3-billion for 2019 through 2023 – nearly a 20-per-cent increase from the five-year plan at this time last year.

When utilities invest money, that’s a good thing: It increases the rate base – the value of assets on which a utility is permitted to earn a regulated rate of return.

The vast majority of Fortis’s capital investments – which include grid upgrades and clean energy delivery – are occurring in its regulated electricity and gas utility businesses in North America and are what the company calls “highly executable, low-risk projects.”

Fortis’s annual dividend has increased for 45 consecutive years now, and that record – the longest for a public company in Canada – is almost certainly going to continue.

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Even as the company has been raising its dividend by about 6 per cent annually, “Fortis’ payout ratio has declined over time and now resides in the mid 60-per-cent range, prompting us to view the 6-per-cent dividend growth target as abundantly achievable,” Raymond James analyst David Quezada said in a note to clients. He rates the stock “outperform” with a target price of $50. The shares, which yield 4.2 per cent, closed Tuesday at $42.79.

Most other analysts are also bullish on Fortis. There are 11 buy recommendations, four holds and no sells, and the average 12-month price target is $47.85.

Remember to do your own due diligence before investing in any security.

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