If you buy right now, you can score yourself a nice little dividend yield of 4.3 per cent on shares of Fortis Inc. (FTS-T)
But you bought back in 2000, you’d have a yield of about 26 per cent on your original investment. Fortis’s dividend has increased by a compound average annual 7 per cent over that period, and its share price has grown about 7.8 per cent. Welcome to the world of dividend growth investing as presided over by Tom Connolly.
Mr. Connolly is a retired teacher who for years wrote the Connolly Report newsletter. He still blogs at DividendGrowth.ca, and recently got in touch to share his latest analysis of Fortis and five additional stocks he either owns or follows. Those other stocks are Canadian National Railway Co. (CNR-T), Metro Inc. (MRU-T), Bank of Nova Scotia (BNS-T), Great-West Lifeco (GWO-T) and Telus Inc. (T-T). If you bought shares of all six in 2000 and held until today, Mr. Connolly calculates that the yield on your upfront cost would be in double digits.
Let’s use Fortis as an example. This widely held utility stock – I’m a shareholder – currently pays an annualized dividend of $2.36 that yields 4.3 per cent on the recent share price of $55.50. Mr. Connolly used a $9 purchase price for Fortis back in 2000, with a 46-cent annualized dividend. Steady annual dividend hikes over the years mean the current $2.36 Fortis dividend yields 26 per cent on the $9 purchase cost.
Growing dividends provide an ever-increasing yield based on your upfront cost to buy shares, and that offsets inflation. Also, a rising dividend often drives share price growth. The six stocks looked at by Mr. Connolly delivered a compound average annual price gain of 7.6 per cent, while dividends increased by 10.6 per cent on average.
Two additional thoughts on dividend growth investing: First, holding a low-yielding stock with a high dividend growth rate can produce a robust flow of dividends for patient long-term investors; second, dividend growth rates for some big blue chips have slowed in recent years. In other words, past growth rates may not be indicative of what’s to come in the future. For example, Fortis increased its quarterly payout by 4.4 per cent late last year.
Mr. Connolly himself relies on dividend growth to fund his retirement, and he believes advisers don’t give the concept enough respect. “Very few advisers or professional wealth managers grasp this kind of retirement investing,” he said by e-mail. “Yield growth is beyond them. They fixate on price way too much.”
-- Rob Carrick, personal finance columnist
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