Tuesday, July 26, 2011

Dividend Growth Stocks

Or, why buy SNC-Lavalin (TSX-SNC) and all that. Not only is SNC a dividend growth stock, it is a growth stock per se. It has grown its dividends over the past 5 and 10 years at 24%. Over the past 5 and 10 years it has increased its stock price by 18% and 30% (it got hit by the last recession). The company’s Dividend Yield is low at a 5 year median rate of 1.1%.

It’s Dividend Payout Ratios for earnings and cash flow is 25% and 21% per year over the past 5 year. Having a low DPR gives the company room for dividend increases and also room to spend on expansion. Also, because it is a growth company it can and it does get hit at recession times. Growth companies have been more volatile in stock prices than more mature or the value investment type companies.

I know that there is a lot of controversy on the “yield on cost” (YOC) concept, but there is no doubt that buying such stock can really boost your income and portfolio, especially if you are saving for retirement. My purchase price for shares in this SNC (accounting for splits) is $3.40. I bought my shares some 13 years ago. The current dividend on this stock is $.84.

Therefore, on my original cost, I get a dividend yield of 25%. One problem with yield on cost is that it is not taking inflation into account. If we include a 3% per year background inflation rate, my yield would, of course be lower at approximately 18%. But, I think the main point remains and that is you can make a lot of dividend income from investments in dividend growth stocks.

In a lot of ways, SNC is in a class of its own as far as being a great dividend payer and a growth company. However, there are a few other such stocks in Canada. But there are a few, as far as I can see, that have potential. They are shown below. Please note that any such lists are entirely subjective. Also, growth stocks do not remain growth stocks forever.
Saputo (TSX-SAP),
Metro (TSX-MRU.A),
Home Capital Group (TSX-HCG),
Toromont Industries Ltd. (TSX-TIH),
Reitmans (TSX-RET.A),
Finning International Inc. (TSX-FTT),
Richelieu Hardware Ltd (TSX-RCH), and
Leon's Furniture Ltd (TSX-LNF).

Some of the best “yield on cost” stocks I have, I have listed below.
For Bank of Montreal(TSX-BMO), after 27 years, I have a YOC of 19.3%.
For Fortis (TSX-FTS), after 24 years, I have a YOC of 16.2%.
For Pembina Pipelines Corp (TSX-PPL), after 10 years, I have a YOC of 16%.
For RioCan Real Estate(TSX-REI.UN), after 13 years, I have a YOC of 12.6%.
For Royal Bank (TSX-RY), after 15 years, I have a YOC of 28%.
For SNC-Lavalin (TSX-SNC), after 13 years, I have a YOC of 25%.

As shown above on stocks from my portfolio, there are other ways besides growth companies with low dividends and high increases to get good YOC. Take for example Fortis, a stock that provides a good dividend and good increases. The 5 year median dividend is 3.7%. The 5 and 10 year dividend increases are 14% and 9%. The 5 year median DPR on EPS and Cash Flow are 65% and 27%. This is a utility company and utility companies did better in the last recession than financials did.

The Globe and Mail recently had an article on this very subject. See New names among the dividend growth stars.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on twitter.


  1. Susan,

    Thank you for your write-up on Dividend Growth stocks. Recently, I read an article on the subject of living off dividend income during retirement. It says that living off dividend income may not be the best option since dividends can artificially inflate your income. If you collect $100 in Canadian dividends, you must report it as if you received $144 as income. This gross-up can trigger OAS clawback, thus reducing your net income. So it may be better for retirees to earn capital gains since $100 in Canadian capital gains is reported as $50 investment income. What do you think of this?


  2. Your are right about the problem with dividend income causing OAS clawbacks. Gross ups will be 41% in 2011 and 38% in 2012. (This is because corporation tax is going down.)

    Problem with earnings capital gains is that it is harder to do. Stocks without dividends tend to be more volatile. I have some of this problem now as I am taking money from my RRSP accounts each year. Half my money is in RRSP accounts and half in a trading account.

    If you need money from a stock, you have to plan approximately 5 years in advance. You know when the market is relatively high and relatively low. You will never know more. No one can time the market.

    You want to cash out stocks when the market is relatively high. In my RRSP accounts, I have dividend and cash equal to what I will need over the next 5 years. This is so I do not have to sell anything at a low price just because I need money.

    If I was just relying on capital gains, it would mean I would need 5 years of cash or near cash. You could put your cash needs into laddered bonds, but this is a lot of work.

  3. An οutstanding ѕhare! I've just forwarded this onto a colleague who was doing a little homework on this. And he actually bought me lunch because I stumbled upon it for him... lol. So allow me to reword this.... Thanks for the meal!! But yeah, thanks for spending some time to discuss this topic here on your blog.
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