Dividend-growth stocks that have starting yields of at least 4% and increase them by at least 5% are safe investments in the stock market. Why? They are mature businesses that generate stable earnings and cash flows that support a healthy dividend.
Most importantly, their payouts continue to grow year after year, so that your money more than maintains purchasing power in the face of inflation.
Here’s a handful of quality stocks that are ripe for buying today and averaging into over time.
Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) is one of my favourite bank holdings. I believe that today it is the best valued bank of the Big Five Canadian banks. At about $61, Bank of Nova Scotia yields 4.6% and has been growing its dividend at an average rate of 7% for the past four years.
With a payout ratio around 50%, Bank of Nova Scotia will have no problem continuing to grow its dividend next year.
Earnings growth leads to dividend growth and ultimately price appreciation.
In fact, approximating growth of 5.4% versus 7%, investors buying today can expect long-term total returns of about 10%.
Telus Corporation (TSX:T)(NYSE:TU) is the fastest-growing telecommunications company in Canada. Its earnings growth has allowed it to grow dividends at an average rate of 10% for the past five years. In fact, the telecom has raised its dividend for 11 consecutive years.
Historically, when Telus hits a yield of over 4%, it’s a good buy. At under $42.50 per share, Telus yields almost 4.2%. With a payout ratio under 65%, Telus’s dividend is safe and is likely to continue to grow.
Using a more conservative growth of 7% going forward instead of 10%, investors buying today can expect long-term total returns of about 11%.
TransCanada Corporation (TSX:TRP)(NYSE:TRP) owns infrastructure to store and transport oil and gas and power plants to generate electricity. From its assets it generates stable cash flows that continue to pump out higher dividends for shareholders.
With the negative outlook in energy, energy-related stocks such as TransCanada are selling at cheap prices. If you have a long investment time frame, it’s a good time to buy TransCanada when shares are about $43 per share with a yield of 4.8%.
The business has not disappointed shareholders by paying a growing dividend for 14 consecutive years. TransCanada even forecasts dividend growth of 8-10% per year through 2020.
Using the 8% growth, the low-end of estimates, investors buying today can expect long-term total returns of close to 13%.
By buying these quality dividend-growth stocks at the moderately high yields of 4-5% that are growing at least 5%, investors can enjoy relatively safe investments that pay you increasing income over time. You can essentially hold the shares forever, and at some point the total income you receive will exceed your investment amounts.
Fool contributor Kay Ng owns shares of TELUS (USA), Bank of Nova Scotia (USA), and TransCanada.