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Trains at the CN MacMillan Yard, in Vaughan, Ont., on June 20, 2022.Nathan Denette/The Canadian Press

Owning dividend growth stocks in retirement is like having an employer who offers generous wage increases every year.

Inflation is running at 3.3 per cent on a year-over-year basis, and average hourly wages rose 5 per cent last month. A collection of 21 stocks tracked by dividend investing authority Tom Connolly produced an average annual 7.8-per-cent increase in cash payouts to shareholders over the past 10 years.

“If your money is growing at that rate, your income is going to be doubling, essentially, in 10 years,” said Mr. Connolly, who for decades published a newsletter called the Connolly Report and now runs a blog for subscribers at DividendGrowth.ca.

The roster of blue-chip stocks he tracked includes all the usual suspects – the Big Six banks plus insurers, telecoms, pipelines, utilities and a few industrials. What’s noteworthy is how effective stocks like these are at producing rising retirement income year after year. Dividend growth stocks are possibly the best inflation hedge all, even in times like these, when the cost of living is higher than it has been in decades.

Mr. Connolly’s analysis starts with an investment of $12,500 or so in each of the 21 stocks back in 2014. He then tracked dividends paid annually through to August, 2023. The compound average growth rate in dividends for each stock was noted, as was the total amount of dividends paid.

The stock that generated the most total dividends was BCE Inc. (BCE-T) at $7,222. A much lower amount was produced by Canadian National Railways (CNR-T) at $$3,560. The difference between the two is worth delving into because it offers some perspective on which dividend growth stocks are best for retirees seeking income first and foremost.

Mr. Connolly’s numbers show that BCE grew its dividend by a 10-year average annual 4.7 per cent, compared with 12.2 per cent for CNR. It’s worth noting that inflation over the past 10 years averaged 2.6 per cent, so both stocks more than offset the rising cost of living.

The dividend growth rate is an important metric to consider in evaluating a stock. But dividend yield is important as well if you put a premium on income rather than growth. A higher-yielding stock will produce more income, even if the annual dividend growth rate is comparatively low.

Back in 2014, BCE’s 4.6-per-cent yield was the product of a share price of $53 and an annualized dividend of $2.44. The $12,500 investment bought 236 shares, which works out to almost $576 in dividends in the first year.

CNR’s 2014 yield of 1.3 per cent was based on a $71 share price and $1 per share in dividends. The $12,500 investment bought 176 shares, which would have produced $176 in dividends in the first year.

Flash ahead to August, 2023, and BCE’s 4.7-per-cent average annual dividend growth has increased the payout to $3.85, while CNR’s average annual growth of 12.2 per cent has produced a dividend of $3.16. CNR is the more dynamic stock, but BCE was more of a cash machine.

It’s common for high-yielding stocks to lag in share price growth compared with lower-yielding companies. A Globe Investor comparison of BCE and CNR shows 10-year cumulative share price growth of 28 per cent and 210 per cent, respectively. Paying less cash out to shareholders creates opportunities for a business to grow.

A general rule from Mr. Connolly: share price growth tracks a company’s dividend growth rate. Not in lockstep, but there is a strong correlation.

The comparison of data for 2014 and 2023 shows both the power of dividend growth and a vulnerability of dividend investing. Many dividend stocks are out of favour right now – just take a look at how much higher their yields are today compared with 2014.

One reason for the dividend slump is the slowdown in dividend growth at some companies. As noted in a recent column, the latest dividend hike for Bank of Nova Scotia (BNS-T) came in at 2.9 per cent, while the latest Enbridge (ENB-T) increase was 3.2 per cent. Both increases are below the levels noted in Mr. Connolly’s analysis.

The bigger factor is high interest rates. With virtually risk-free federal government treasury bills yielding about 5 per cent, some investors have pivoted away from dividend stocks. When a dividend stock’s price falls, its yield rises.

Whether it happens at some point in 2024 or beyond, interest rates will start to fall and dividend stocks will become more appealing to investors. Buying now puts you in a position to benefit from high yields in 2023, dividend growth in the future and the potential for capital gains.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 13/06/24 9:52am EDT.

SymbolName% changeLast
BCE-T
BCE Inc
-0.79%46.68
EMA-T
Emera Incorporated
-0.06%46.47
CM-T
Canadian Imperial Bank of Commerce
-0.85%66.26
NA-T
National Bank of Canada
-0.32%109.14
T-T
Telus Corp
-1.09%21.85
BNS-T
Bank of Nova Scotia
-0.68%64.53
BMO-T
Bank of Montreal
-0.9%115.51
POW-T
Power Corp of Canada Sv
-0.92%38.78
TRP-T
TC Energy Corp
-0.13%53.59
RY-T
Royal Bank of Canada
-0.76%143.73
GWO-T
Great-West Lifeco Inc
-0.98%39.46
TD-T
Toronto-Dominion Bank
-0.84%75.11
ENB-T
Enbridge Inc
-0.43%48.72
FTS-T
Fortis Inc
-0.09%54.04
TIH-T
Toromont Ind
-0.51%119.06
CU-T
Canadian Utilities Ltd Cl A NV
-0.1%30.8
CTC-A-T
Canadian Tire Corp Cl A NV
-0.43%139.82
ACO-X-T
Atco Ltd Cl I NV
+0.2%39.7
CNR-T
Canadian National Railway Co.
-1.33%166.83
EMP-A-T
Empire Company Ltd
-0.24%32.65

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