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As a company’s dividend growth goes, so goes its share price.

Example One: The dividend at Canadian National Railway Co. (CNR-T) dividend increased by an average 15.6 per cent over the past 10 years, and the share price increased by an average annual 15.7 per cent.

Example Two: The dividend at Metro Inc. (MRU-T) increased an average 15.9 per cent over the past decade and the share price rose 16.9 per cent on an annualized basis.

Example Three: Bank of Nova Scotia (BNS-T) increased its dividend by an average annual 6 per cent and the bank’s shares gained an average annual 7 per cent.

These numbers were supplied by Tom Connolly, former publisher of an exclusive newsletter called The Connolly Report and one of the country’s foremost experts on dividend investing. In a recent report for his followers, Mr. Connolly included a chart that highlights one of his key dividend investing rules: “As the dividend goes, so does the price.”

Canadian investors are dividend enthusiasts for good reason – they provide tax-advantaged gains in non-registered accounts and they’re a big part of the total returns generated by the stock markets. Total return means dividends combined with changes in share price.

The best dividend stocks offer dividend growth – consistent annual increases in the cash investors receive each quarter. Dividend growth can help you offset the effects of inflation and drive share price growth.

No, the link between dividend growth and share-price appreciation isn’t a done deal.

Take energy stocks, for example. Mr. Connolly’s data show that the dividend at Imperial Oil Ltd. (IMO-T) increased by an average 7.4 per cent annually over the past 10 years, but the share price fell by 1.7 per cent on an average annual basis. In other cases, the correlation between dividends and share price is fuzzy. Loblaw (L-T) dividends rose 4 per cent annually, while the share price increased 9.8 per cent.

Over all, though, the correlation is striking. Dividends for the 31 stocks followed by Mr. Connolly rose by a 10-year average annual 8.2 per cent, while share prices gained 8.6 per cent. That’s the power of dividend growth in action.

Follow Rob Carrick on Twitter: @rcarrickOpens in a new window

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