The food retailer Empire Co. Ltd. recently announced it would raise its quarterly dividend by a cent per share. Could there be a more yawn-inducing piece of financial news?
Let dividend investing expert Tom Connolly show you otherwise. Mr. Connolly has retired from writing his investing newsletter, the Connolly Report, but he’s still watching the dividend world. Recently, he got in touch by e-mail to highlight the Empire dividend increase as good news for income-seeking investors.
Empire’s quarterly cash payout to investors rises to 12 cents a share from 11 cents, which works out to four cents on an annualized basis. As Mr. Connolly points out, that’s an increase of 9.1 per cent. Inflation as of the most recent Statistics Canada report was 2.4 per cent on a year-over-year basis.
Mr. Connolly uses the Empire dividend increase as a lesson about focusing on the percentage amount of a dividend hike and not the dollar amount. “It's no wonder investors do not realize the power of dividend growth when the papers say the dividend is up by one cent,” he wrote in his e-mail.
There’s a small catch, though. Mr. Connolly judges whether stocks in his dividend-paying universe are a buy by looking in part at the yield. A low yield suggests a stock has been bid higher by investors and thus isn’t a bargain. He regards Empire’s current yield in the 1.5-per-cent range as suggesting the opportunity to buy the stock on the cheap has passed.
Keep this in mind if you’re investing for growth. If it’s income you’re after, then Empire may still be worth a look. Yes, the yield is low. But the growth level in the dividend recently offers some compensation. Mr. Connolly calculates the stock’s 10-year annualized dividend growth to Dec. 31, 2018, at 6.6 per cent.
In general, Mr. Connolly prefers low-yielding stocks with strong dividend growth rates over high-yielding stocks with weak dividend growth. “High yield usually means poor or no growth,” he wrote. “Growth is needed to build wealth.”