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Canada is losing one its most useful, modest and consistent investing voices.

After close to 40 years, Tom Connolly is about to shut down his quarterly dividend investing newsletter, the Connolly Report. “I want to spend more time at the cottage and that kind of thing,” the 78-year-old resident of Kingston said.

Plainly printed in black and white, each edition of the Connolly Report is a jumble of numbers, charts, musings and quotes from the likes of Warren Buffett and Benjamin Graham, the father of value investing. You want slick? Read Fortune. If you want salt-of-the-earth investing wisdom with direct applicability to the lives of everyday investors, try Mr. Connolly.

Lots of investors have done just that. The Connolly Report has 150 print subscribers and there are another 800 who follow him via his website, The website will continue into 2019, even after the newsletter is shut down.

Mr. Connolly’s investing philosophy is nothing more than buying the shares of quality Canadian companies that consistently raise their dividends over the years and holding them for the long term. It’s quite possible that no one has better articulated the reasons why you should do this.

Mr. Connolly champions dividend growth investing not just for income, but also for long-term inflation protection and as a driver of share-price gains. To find out more about his investing approach, I did a sort of exit interview recently where we discussed his own portfolio, how to identify quality dividend stocks, his mistakes and a stock that yields close to 100 per cent on his initial investment. Here’s an edited transcript of our conversation.

Dividend stocks just might be hottest the retail investing trend of the past decade. How did this happen?

At a time of low interest rates, the yields are pretty good. The average yield on my list is 4 per cent. Look at stocks like the telecoms and the banks – a lot of their yields are over 4 per cent.

A lot of people have taken money out of bonds or term deposits and put it into dividend stocks to generate investment income. Do you have any concerns that they will be hurt in a stock-market correction or recession?

Yes, if they bought dividend stocks instead of dividend-growth stocks. If there’s no dividend growth at all, I don’t think you can call them quality stocks. If you’ve got a dividend stock and it’s a lousy stock, you’re going to get your comeuppance eventually.

Can you define what you mean by dividend growth?

I like to try for 10 years of dividend growth, but sometimes you bend down below 10 years if you have a good one. [Note: Two stocks Mr. Connolly added before they had 10 straight years of dividend increases are Intact Financial Corp. and Canadian Tire Corp. Ltd.]

You talk a lot about the idea of quality dividend stocks. What are some measures investors can use to find quality?

If the dividend is growing and the payout ratio is reasonable – generally around 50 per cent, though utilities are higher.

You’ve said that the price paid for dividend stocks has a big impact on returns, which is true in all investing. Are there any sectors or stocks that are in attractive territory because of recent stock-market declines?

The electrical utilities Fortis Inc., Emera Inc. and Canadian Utilities Ltd.

Anything else looking attractive?

Not really. The stock market, generally, is a bit overpriced still. There’s nothing in the sectors that I follow that I’d look at right now. The electrical utilities are an exception.

What can you tell us about the correlation between rising dividends and a growing share price?

What I like to do before I buy a stock is to check the dividend 10 years ago and the share price 10 years ago and see what’s happened. For a few of them, growth rates are exactly [the same]. Most are within a very small range.

The inflation rate is about 2.4 per cent – how much are your dividends growing every year?

The 10-year data is 9.1-per-cent dividend growth annually. The five-year growth rate is 9.6 per cent. All the dividends aren’t in yet this year, but it looks like the growth rate will be 8 per cent.

An underappreciated aspect of dividend-growth investing is that you get an increasing yield on your initial investment as the years roll by and your stock keeps increasing its dividend. What yields (annual dividend divided by share price) are you getting on some of the stocks you’ve owned for a long time?

I had a terrific example come in yesterday – Bank of Nova Scotia. We bought it in 1990 at $3.64 (split-adjusted) and the annual dividend is now $3.40. That’s our first one that is going to be around 100 per cent (the yield now works out to 93.4 per cent). It took 28 years.

What sectors do you avoid as a dividend-growth investor?

Energy is the main one. The energy sector is cyclical, and so their dividends can be cyclical, too.

Have you owned any dividend stocks that came to a bad end?

Royal Trust. The dividend disappeared and it was taken over by Royal Bank of Canada. I shouldn’t have bought it – the yield was 9 per cent or something like that. Home Capital Group Inc. was another one we took a beating on. TransAlta Corp. was another one that I shouldn’t have bought because the yield was too high.

You focus on Canadian stocks – isn’t it important to diversify with exposure to U.S. and international markets?

I don’t think I need to if I’m getting the returns I’m getting here in Canada. And I’ve got the tax advantage with Canadian stocks. [Note: The dividend tax credit offers a preferential tax rate on eligible dividends paid into a non-registered investment account.]

Can you tell us about your portfolio and any others you look after?

Mine has five stocks, my wife has six and her sister has eight or so. Each includes a bank, a utility, a telecom and a pipeline.

How often have you found yourself out of step with the latest trends and fads in the market?

It happens every few years. I ignore it, including all the current stuff about cannabis. I kind of go down the middle between all of those trends the market gets excited about. You can’t [hop on board the latest trends] and win.

As Goes the Dividend, So Goes the Share Price

Here's a 12-pack of dividend growth stocks followed by Tom Connolly, publisher of a dividend-focused investing newsletter that will close in December after 38 years. Shown here are annualized dividend growth and share price appreciation over the past 10 years. Note how dividend growth tends to propel similar levels of share price growth over the long term.

Company Ticker (TSX) 2008 dividend ($) 2018 dividend ($) Annualized Growth (%) 2008 price ($) 2018 price ($) Annualized Growth (%)
Canadian National Railway CNR-T 0.46 1.82 14.7 26 113 15.8
Metro Inc. MRU-T 0.17 0.72 15.8 11 43 14.6
Intact Financial Corp. IFC-T 1.24 2.8 8.5 40 105 10.1
Toronto-Dominion Bank TD-T 1.18 2.61 8.3 31 73 8.9
Canadian Tire Corp. CTC.A-T 0.84 3.6 15.7 68 152 8.4
Bank of Montreal BMO-T 2.8 3.78 3 45 99 8.2
Telus Corp. T -T 0.9 2.06 8.6 22 47 7.9
Royal Bank of Canada RY-T 2 3.77 6.5 45 95 7.8
Emera Inc. EMA-T 0.97 2.28 9 22 44 7.2
Enbridge Inc. ENB-T 0.66 268 15 22 43 6.9
Rogers Communications Inc. RCI.B-T 0.88 1.92 8.2 38 71 6.5
Fortis Inc. FTS-T 1 1.73 5.6 28 47 5.3

Source: Tom Connolly

Note: 2008 share prices are an average for the year; 2018 price is as of Nov. 17