3 Cornerstone Dividend Growth Stocks for Your Retirement Portfolio

These three dividend champions offer solid growth potential for retirement income investing.

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The Motley Fool

With the cost of living continuing to spiral, you can never start planning for retirement too soon. One strategy that offers considerable potential for building a comfortable retirement nest egg is long-term investing in dividend stocks with solid yields and strong growth potential.

However, not all stocks are created equal; it is important to identify those that have the ability to continue growing earnings while paying a consistently growing dividend. Let’s take a closer look at three stocks that possess these crucial characteristics.

This phosphate miner has a solid long-term outlook

Canadian-listed PotashCorp (TSX: POT)(NYSE: POT) continues to retain a solid long-term outlook as the demand for agricultural chemicals and fertilizers grows exponentially. This is because a rapidly growing global population is causing food demand to rise exponentially while the declining quantity of arable land is necessitating increased crop density.

This bodes well for the company’s future financial performance and, along with growing potash demand fueling higher potash prices, was a key driver of the company reporting better-than-expected results in the first quarter of 2014.

More impressively, the company pays one of the better dividend yields in the S&P TSX 60, the index of Canada’s 60 largest listed companies. Its tasty yield of 4%, coupled with a sustainable payout ratio of 74%, makes it an appealing long-term buy-and-hold dividend stock. In particular, PotashCorp’s dividend has grown by 3,750%, or a compound annual growth rate of 16% since its inception, which is more than eight times the annual average inflation rate over the same period.

Although the company has recently been beset by some woes, it offers investors a solid dividend yield that will continue to grow with demand for fertilizers continuing to increase, making it an excellent opportunity for long-term investing.

This bank has solid emerging markets exposure

Another S&P TSX 60 company with solid, long-term growth prospects and a great dividend yield is the Bank of Nova Scotia (TSX: BNS)(NYSE: BNS). The bank currently pays a dividend with a juicy yield of 3.5%. When this is coupled with a very conservative and sustainable payout ratio of 45%, it is apparent that the bank is capable not only of continuing to pay its dividend but also of potentially hiking its dividend payments.

Even more compelling for long-term investors is that this dividend continues to grow, with a compound annual growth rate of 4% over the last 20 years and signs that there are more dividend hikes to come.

It is the bank’s long-term growth strategy of investing in Latin America, in particular Colombia, Chile, and Peru, that is its ace in the hole. The bank has already built a substantial presence in Colombia and Peru, and recently made a significant acquisition in Chile, buying a controlling interest in the financial services business of Cencosud, one of Latin America’s largest retailers.

International banking contributes 23% of the bank’s net income and has seen loans and deposits expand by a healthy 16% over the last year, highlighting the significant growth prospects offered by emerging markets. Over the long term, as those economies develop and their financial service sectors become more sophisticated, the demand for traditional banking, insurance, and wealth products will grow exponentially. All of these things will see this business segment’s earnings explode, boosting the bank’s overall bottom line.

Bank of Nova Scotia is the only top five bank with significant emerging market operations, and despite the perceived risks, this gives it a significant advantage over its peers. As a result, I am expecting the bank’s earnings to continue growing over the long term, fueling further dividend hikes and making it an attractive long-term retirement investment.

This pipeline company has an almost guaranteed income stream

For investors seeking solid, long-term investment opportunities for retirement, there are plenty of choices in Canada’s energy patch, particularly with growing global demand for crude continuing for the foreseeable future. One company that stands out as being attractively priced at this time while possessing solid long-term growth potential is oil transportation and storage company TransCanada (TSX: TRP)(NYSE: TRP).

With the company finding itself mired in controversy over the approval of its Keystone pipeline, it has found its shares unloved by the market, leaving it undervalued compared to its peers. TransCanada appears attractively priced with an enterprise value of 14 times EBITDA compared to Enbridge’s (TSX: ENB)(NYSE: ENB) 23 times and Pembina’s (TSX: PPL)(NYSE: PBA) 18 times.

Even more compelling for long-term investors is its dividend yield of 3.6% and its sustainable payout ratio of 78%, making it an attractive long-term, income-focused investment for retirement. This is even more as Pembina, Enbridge, and TransCanada hold a virtual oligopoly over crude transportation in the patch.

This, coupled with Canadian crude production set to grow by an average of around 4% annually between now and 2020, gives TransCanada a virtually guaranteed growing income stream, ensuring that the company is capable of continuing to hike its dividend payments for the foreseeable future.

All three stocks offer investors a solid dividend yield, dominant positions in their respective industries, and considerable long-term growth potential, which will more than likely see them continue to hike their annual dividend payments.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Matt Smith has no position in any stocks mentioned. The Motley Fool owns shares of PotashCorp.

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