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I love dividends.

But there’s something I love even more: dividend increases.

When a company raises its dividend, it isn’t just putting more money in shareholders’ pockets. It’s also sending a signal that the business is doing well and has the growing revenues and cash flows to sustain the dividend at the new, higher level.

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A dividend increase, in other words, is a quick and dirty way to identify strong companies – the same sort of companies whose share prices tend to rise over the long run. That’s why I focus on stocks that raise their dividends regularly.

The strategy has produced solid results.

Through July 31, my model Yield Hog Dividend Growth Portfolio posted a total return of 19.2 per cent since inception on Oct. 1, 2017. That’s equivalent to an annualized return of about 10 per cent, which tops the annualized return of 5.9 per cent for the S&P/TSX composite index over the same period. (All returns include dividends.)

Today, we’ll look at three companies that hiked their distributions recently and have a high probability of continuing to raise their payouts. Remember to do your own due diligence before investing in any security as there are risks with every stock.

Capital Power Corp. (CPX)

Price: $30.05

Yield: 6.4 per cent

Edmonton-based Capital Power is a growth-oriented power producer, with 26 facilities in Canada and the United States that generate electricity using natural gas, wind, coal, solar, waste heat or landfill gas. About 70 per cent of Capital Power’s cash flow is from electricity sold under long-term contracts, which contributes to earnings stability. But in its home province of Alberta – where power prices are expected to rise after the government’s recent decision to maintain the province’s electricity market structure – “the company has significant torque to higher power prices … and the ability to capture material upside during periods of greater volatility,” analyst Jeremy Rosenfield of Industrial Alliance Securities said in a note. Fuelled by acquisitions and new project developments, the company has hiked its dividend for six consecutive years, including a 7.3-per-cent increase announced on July 29. The latest hike is consistent with Capital Power’s 7-per-cent dividend growth guidance through 2021 and targeted payout ratio of 45 per cent to 55 per cent of adjusted funds from operations (a cash flow measure). The retirement of president and chief executive officer Brian Vaasjo in 2020 creates some uncertainty – the board is currently searching for a successor – but I expect that the company will continue to prosper.

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

Price: $43.03

Yield: 4.4 per cent

In a fast-food industry marked by brutal competition and heavy promotional activity, A&W has posted four consecutive quarters of double-digit same-store sales growth – a remarkable feat driven by the chain’s emphasis on high-quality ingredients and new menu items such as Beyond Meat burgers and breakfast sandwiches. A&W’s sales growth has translated into a rising share price and distribution increases in each of the past six quarters, including a 3.2-per-cent hike announced on July 24. With competitors including Tim Hortons getting into the Beyond Meat game and A&W now coming up against very strong sales gains from a year ago, however, it’s unlikely the chain can keep same-store sales growing at such a torrid pace. Still, Laurentian Bank Securities analyst Elizabeth Johnston sees A&W’s same-store sales rising 3 per cent in the second half, and she’s forecasting an additional 2-per-cent distribution increase in 2019 and a 4-per-cent hike in 2020. (Note: A&W’s distribution is classified as a “non-eligible dividend,” which is taxed at a lower rate than interest or other income but a higher rate than an eligible dividend.)

SmartCentres REIT (SRU.UN)

Price: $32.19

Yield: 5.7 per cent

SmartCentres Real Estate Investment Trust is best known for its Walmart-anchored retail centres that feature the REIT’s penguin-themed logo. But what makes SmartCentres appealing as a long-term play is its extensive development pipeline that includes residential, office and retail properties. With new projects starting to contribute meaningfully to SmartCentres’ bottom line, “2020 is shaping up to be a solid year of growth,” RBC Dominion Securities analyst Pammi Bir said in a note. SmartCentres has hit some bumps recently – such as the closings of the Payless Shoes and Bombay/Bowring chains – which may explain why the units are trading at a 4-per-cent discount to the REIT’s estimated net asset value (NAV). But the discount might not last. “With visible drivers of both near-term and long-term NAV growth, a defensive portfolio, a healthy balance sheet, and the sector’s most experienced development platform, we see tailwinds to support compression of the gap and remain buyers,” Mr. Bir said. In the meantime, investors can collect an above-average yield and a distribution that has grown for six consecutive years, including a 2.8-per-cent increase announced on Aug. 8. (Note: SmartCentres’ distribution typically consists of other income, capital gains and return of capital and does not qualify for the dividend tax credit.)

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The author owns CPX, AW.UN and SRU.UN personally and holds CPX and AW.UN in his model Yield Hog Dividend Growth Portfolio.

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