The most persuasive argument for dividend-growth investing is that you get an inflation-fighting bump in income each year.
But rising dividends also drive higher share prices. Not always – good old BCE Inc. (BCE-T) is a prime example. But some analysis by veteran dividend investing expert Tom Connolly shows a rough but undeniable correlation between the compound average growth rate for dividends and share prices.
Mr. Connolly recently sent over a list of 24 stocks he follows with 10-year numbers for both dividend and share price changes. Some of the closest correlations were found with these stocks:
- Sun Life Financial Inc. (SLF-T): 10-year annualized dividend growth of 8.4 per cent, share price growth of 8.1 per cent.
- Manulife Financial Corp. (MFC-T): Dividend growth of 10.9 per cent, share price growth of 7.7 per cent.
- Fortis Inc. (FTS-T): Dividend growth of 6.3 per cent, share price growth of 5.5 per cent.
- Metro Inc. (MRU-T): Dividend growth of 12.9 per cent, share price growth of 13.2 per cent.
- Empire Co. Ltd. (EMP.A-T): Dividend growth of 8.6 per cent, share price growth of 5.2 per cent.
Four big banks – National Bank of Canada (NA-T), Bank of Montreal (BMO-T), Canadian Imperial Bank of Commerce (CM-T) and Royal Bank of Canada (RY-T) – all grew their dividends by an average annual 6 to 9 per cent and had comparable share price growth. Outliers were Bank of Nova Scotia (BNS-T) and Toronto-Dominion Bank (TD-T), where share price lagged dividend growth significantly.
On average, the stocks examined by Mr. Connolly increased dividends by a compound annual growth rate of 8.2 per cent, and their share price grew by 4.5 per cent. The average numbers were dragged down by BCE, with 10-year dividend growth of 5 per cent and a share price decline of 4.1 per cent on an annualized basis. Two other stocks with rising dividends and a decline in share price were Canadian Utilities Ltd. (CU-T) and Atco Ltd. (ACO.X-T).
A few other dividend stocks showed minimal share price growth, despite inflation-beating dividend hikes. Examples include Telus Corp. (T-T), with 10-year dividend growth of 7.5 per cent and a share price growth of 0.5 per cent; and, TC Energy Corp. (TRP-T), with 10-year dividend growth of 7.2 per cent and share price growth of 1.8 per cent.
Stocks like these, with share price gains lagging dividend growth, might potentially be a buying opportunity for patient investors. Other stocks in this club include Enbridge Inc. (ENB-T), Canadian Natural Resources Ltd. (CNQ-T) and Canadian National Railway Co. (CNR-T).