Tim Hortons Inc.: The Ultimate Dividend Growth Machine

No matter who you are or what you do, it can be a bad idea to compare yourself to others. Instead, you should compare yourself to how you were before; if you’re moving in the right direction, that’s all that should matter.

The same could be said for dividends. Too often, investors simply compare different dividends and choose the highest yield. Instead, you should look for dividends moving in the right direction, which is towards growth.

Why is this the case? Well, a big dividend yield can be a sign of weakness in the company’s earnings, or a sign that the dividend payout is too high. Meanwhile, a growing dividend indicates that a company is performing well and generating plenty of income.

On that note, there is one dividend growth machine that should be on everyone’s radar: Tim Hortons Inc. (TSX: THI)(NYSE: THI). Below we take a look at why.

A strong franchise

According to Canadian Business, Tim Hortons has the No. 1 brand in all of Canada. So no matter what competitors do, a large percentage of the company’s customers will never leave. This should be music to the ears of any dividend investor.

On this front, the news could still get better. Its customers typically spend about 23% to 45% less per visit than customers of its rivals, but the company intends to narrow that gap, primarily by introducing more menu items.

So far these efforts seem to be off to a good start, as exemplified by the most recent quarter’s results. In the most recent quarter, sales rose 2.6% and 5.9% in Canada and the U.S. respectively, surpassing expectations.

An affordable dividend

At first glance, the dividend does not seem to be very attractive — at $0.32 per share per quarter, the dividend now yields less than 2%.

However, there is good news. Unlike some high-yielding companies, many of which are in the energy sector, Tim Hortons pays out a dividend it can afford. Last year, the company made $2.82 per share, and analysts are projecting $3.25 per share for this year. As you can see, there is plenty of room for the dividend to increase.

A remarkable track record

Sometimes the best way to predict the future is to look at the past — and when looking at Tim Hortons’ past, the future looks very promising indeed.

When the company first went public in 2006, the dividend stood at a measly $0.07 per share. Since then, the dividend has increased more than 350%. It’s also been raised every single year, even during the financial crisis.

No need to worry

Remember the point of dividend investing — buying a stock, holding it for a long time, and collecting the dividend. You don’t want to have to worry about a potential cut, which usually results in some hefty capital losses, too.

With that in mind, sometimes it’s better to sacrifice some yield in order to get some peace of mind. This is likely one of those situations.

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