Dividend growth is an income investor’s secret weapon.
While growth investors balk at the 1-4% payouts that dividend stocks typically offer, they often forget about the potential for payout increases.
According to some reports, Warren Buffett has managed to achieve a yield on cost of 60% on the Coca-Cola position he started building in the 80s.
That’s hardly an impossible feat to replicate. If you own a stock that starts out with a 3% yield, and it increases its payout by 10% a year, it will only take you about seven years to double your payout and another seven years to double it again — and so on, assuming that 10% growth rate can be maintained.
With 10% dividend growth and modest capital gains combined, you can get a truly spectacular long-term result. You can get an even better result if your dividend stocks perform better than that, as one TSX gold stock has been doing over the past five years.
Kirkland Lake Gold
Kirkland Lake Gold (TSX:KL)(NYSE:KL) is a Canadian gold miner with operations in Canada and Australia.
The company has been increasing its gold output over the past few years, which, when combined with the recent bullishness is gold, has led to truly phenomenal results.
Since the start of 2017, Kirkland Lake Gold shares have risen 750%.
A market-beating return by any standard, those gains were accompanied by dividends. Although the payout is fairly low right now, it was recently increased by 50% from $0.04 to $0.06, resulting in a 0.53% yield in the next quarter.
A 50% payout increase isn’t something you see every day, but as you’re about to see, KL’s massive dividend jump appears quite justified by earnings growth.
Phenomenal third-quarter earnings
In Q3, Kirkland Lake Gold defied all expectations, posting net earnings of $0.84 per share, triple what it posted the year before. Those earnings were also a solid 69% jump over the prior quarter. Free cash flow also tripled year over year, while revenue, EBITDA, and operating cash flow saw increases between 70% and 148%.
If Kirkland Lake Gold’s 50% dividend increase seems too good to be true, it’s worth pointing out that such growth could justify an even bigger one. Additionally, the company’s payout ratio is extremely low at 5.63%.
Can the company keep it up?
It’s one thing to point out that Kirkland Lake Gold posted strong growth last quarter, quite another to predict that it will do it again next quarter.
However, it’s possible that it could.
In Q3, Kirkland Lake mined 240,000 ounces of gold, up from 180,000 in the same quarter a year before. If the company can keep up its production growth at that rate, then it wouldn’t even need bullishness in gold to continue outperforming. Of course, strong gold prices are the secret sauce that allowed the company to triple its earnings when production increases were more modest. So, for the company to keep up growth at this frothy pace, it will need continued appreciation in the price of gold.
