Mature businesses that continue to grow pay growing dividends to share the profits with shareholders. You’d think that by being part owners of these businesses that shareholders are rightfully entitled to dividends.
However, it’s not mandatory for companies to pay dividends. That’s why if you care about receiving consistent dividends, you should buy businesses that have a culture or a history of doing so.
Three of the top five Canadian dividend-growth businesses that are publicly traded are utilities. These three utilities have paid growing dividends for at least two decades. They include Canadian Utilities Limited (TSX:CU), Fortis Inc. (TSX:FTS), and ATCO Ltd. (TSX:ACO.X).
If you’re new to investing, those are great businesses to start your portfolio because of their earnings strength and dividend-growth history.
Grow your income
Simply stick with quality businesses such as these utilities and see your money grow in time.
Stock prices are volatile and unpredictable in the short term. But dividends are more predictable because you can determine if they’re safe or not by looking at the earnings power of the business and the payout ratio–the percentage of earnings that’s paid out.
Even if you’d bought these utilities only 10 years ago in January 2005, you would have seen these amazing results with your income growth.
More than double your income!
Ten years ago you could have bought ATCO shares for $15 per share. In 2005 you would have received an annual payout of 38 cents per share from its quarterly dividend of 9.5 cents per share.
Today the utility has an annual payout of 99 cents per share, which is a quarterly dividend of 24.75 cents per share. In essence, your income would have increased 160% in 10 years.
You could have also bought Canadian Utilities shares for $15.50 per share. In 2005 you would have received an annual payout of 56 cents per share from its quarterly dividend of 14 cents per share.
Today the utility has an annual payout of $1.18 per share, which is a quarterly dividend of 29.5 cents per share. In essence, your income would have increased 110% in 10 years.
You could have bought Fortis shares for $17.20 per share. In 2005 you would have received an annual payout of 57.6 cents per share.
Today the utility has an annual payout of $1.50 per share, which is a quarterly dividend of 37.5 cents per share. In essence, your income would have increased 143% in 10 years.
You shouldn’t put all of your money in utilities. You probably want to build a diversified portfolio of quality dividend-growth stocks to spread your risk around.
For example, Bank of Nova Scotia is one of Canada’s top banks and a good long-term investment that has paid dividends since 1832. Telus Corporation is another good choice. Both companies yield over 4% today and their dividends are expected to continue growing.
The main idea is to hold quality businesses that have a history of growing dividends such as all of the companies I’ve mentioned in this article. Hold them for a long time and you’ll see your income double or more.
For instance, Fortis targets annual dividend growth of 6% through 2020. If it continues growing dividends at that rate, the income from an investment in Fortis today would double in 12 years.
What’s more? Dividend growth will eventually lead to price appreciation.