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Double Defence: Invest for Value and Growing Dividends

Double your defences by investing in dividend-growth stocks, which are at least reasonably priced. The first line of defence is getting growing income from growing dividends. The second line of defence is buying dividend-growth stocks when they’re fairly valued or better.

One way to filter out dividend-growth stocks from dividend stocks is by looking at the dividend history of a company. The Big Five Canadian banks, including Toronto-Dominion Bank (TSX:TD)(NYSE:TD), tend to increase their dividends each year. Moreover, they offer market-beating yields of 3-5%.

If you buy the banks at fair valuations or better, you can simply hold them and earn a growing income. Currently, their shares are, at best, fairly valued compared to their long-term normal multiples. So, they would be better buys on pullbacks.

I like another dividend-growth company, which has higher growth prospects and is priced at a reasonable valuation today. It’s Alimentation Couche Tard Inc. (TSX:ATD.B).

 

Growth leads to dividend growth

Money_Dividends_grow16-9Couche Tard has been growing organically and through acquisitions. Its return on equity has been above 15% since fiscal 2007 and above 20% since fiscal 2010, which indicates high profitability and that it is generating value from its acquisitions and integrations.

Despite growing from one convenience store 37 years ago to more than 12,000 stores around the world today, Couche Tard is still growing strongly.

Other than integrating multiple acquisitions and benefiting from their synergies, which result in cost reductions, Couche Tard will also be completing its acquisition of CST Brands early this year. These factors should allow Couche Tard to maintain a high return on equity for the next two to three years.

As a result of Couche Tard’s tremendous growth, the five-year compounded annual growth rate for its dividend has been 26%. In 2016 alone, it raised its dividend by 40%. Its dividend growth is supported by its free cash flow growth.

Valuation

At about $61 per share, Couche Tard trades at a forward price-to-earnings ratio of about 19 for an expected earnings-per-share growth rate of 13-16% per year for the next three to five years. This is a decent valuation for a consumer staples stock in the current market.

The takeaway

By investing in dividend-growth stocks which are priced at reasonable or discounted valuations for their growth profile, investors are doubling their defences.

Firstly, the less you pay for the shares of a good company, the better. Secondly, while you own the shares, you can get a growing income from a growing dividend.

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Fool contributor Kay Ng owns shares of ALIMENTATION COUCHE TARD INC. Alimentation Couche Tard is a recommendation of Stock Advisor Canada.

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