Why a Growing Yield Matters

Since retiring I've tried to structure my portfolio so that when I flip my RRSP to a RRIF all my investments will be income generating dividend growth stocks.

I want not only quality investments that pay dividends but more importantly companies that consistently grow that dividend.

Canadian Utilities (CU) for example has a 43 year record of consistently raising their dividend. It currently pays a 5% yield. You never hear of this name during the nightly business news show. It's just not sexy enough.

Matter of fact right now most professional money managers are telling you to stay clear of any utility stocks in this rising rate environment we're in.

This is perfect for income investors in search of a growing yield. CU has a 10 year growth record of 8.6%. Investors in CU for the last 10 years have enjoyed a double digit total return. Why would anyone even consider selling a stock like this with that kind of return? These stocks are better than bonds by a country mile and safer too.

Philip Fisher in Common Stocks and Uncommon Profits says that "the longer the dividend growth record the better." The book was first published in 1958 and then again in 1996. It is popular with Warren Buffett who credits Fisher with about 20% of his investing acumen. All the general investing advice is just as pertinent today as it was when it was first penned. Advice like;

• stick with it once you have chosen your company
• start with one stock, then choose another
• you must have considerable patience before your investment pays off
• 10-25 years is sometimes necessary before your original investment brings outstanding profits
• small investors can find outstanding companies and do this easily
• have faith, the only proof will be in the pudding

This is a book that all income investors should and in my opinion must own.

Other Top Dividend Growers

Fortis (FTS) - 44 consecutive years of raising it's dividend, 10yr DG=7.1%

Empire (EMP.A) - 23 years and 10yr DG=7%

Bell (BCE) - 9 years and 10yr DG=7%

Enbridge (ENB) 22 years and 10yr DG=14.6%

National Bank (NA) 8 years and 10yr DG=7.2%

Canadian National (CNR) 22 years and 10yr DG=14.7%

(Courtesy of Tom Connolly over at dividendgrowth.ca)

TULF - (stands for) telecom, utilities, low yield and financial. You can also throw in some food stocks. These are all covered here with great DG records and decent yields.

If you are new to dividend growth investing keep in mind that an initial low yield should not deter your purchase. It is the side order of growth that you are also after. Pick stocks that have already proved it or research low yield stocks and what growth records they have achieved.

I immediately sell stocks that cut their dividends. When you make a mistake or it doesn't work out, there will always be something to buy.

Over time you will see your original investment explode upward in value, you just have to follow the plan and don't be swayed off course by short term bad news. Stop watching your stocks and listening to the financial news on a daily basis. You will always react in a way tht is detrimental to your financial health.

Fisher also goes on to say this "Given a reasonable time, low yield stocks will outperform high yield stocks for dividend return. As the dividend grows so does the capital. Value is enhanced later as the yield is low in the initial years of holding."

What do you look at when selecting companies to invest in?

Related Post: Do Your Stocks Make Money?