Dividend-growth investing is one of the best investment strategies out there today, especially if you’re looking to create a retirement portfolio for your future self. Although many retirees live off the income of high-yield stocks in industries such as REITs, telecoms, or utilities, rising interest rates are a clear long-term headwind that could dampen the performance stocks within these industries.
That means retirees are unlikely to obtain impressive capital gains that such asset classes produced in the rock-bottom interest rate environment. High-yield stocks are an essential part of a retiree’s portfolio, but as interest rates continue to rise, not only will capital gains be dampened, but medium-term dividend growth could also start to slow.
If you’re at least five years away from your expected retirement, then you may wish to accumulate high-quality stocks with histories of generous dividend increases. Although such stocks may not have attractive dividend yields when you first buy them, it’s important to note that these dividends will likely surge by leaps and bounds the longer they’re in your portfolio. So, a dividend that yields 1% today could double to 2% based on your original principle in five years from now and surge to 4% a decade from now.
Waste Connections Inc. (TSX:WCN)(NYSE:WCN) is a dividend-growth king in the making as a waste service provider with incredibly solid free cash flow margins, and an experienced management team. Although trash collection may seem like a boring, slow-growth business, Waste Connections actually has one of the most impressive organic growth profiles in its industry.
The company recently reported its Q3 2017 results, which were slightly better than analyst expectations. Revenue was clocked in at $1.206 billion, slightly beating analyst expectations of $1.188 billion. Adjusted EBITDA was recorded at $393.4 million, also beating topping the street consensus of $386.4 million.
The results were really nothing to get too excited about since they were in line with what analysts were projecting. Management announced that it’d likely pull the trigger on acquisitions in the near future as its cash pile, currently just shy of $500 million, continues to build.
The announcement of the 16.7% dividend hike was the cherry on top, and I believe many more generous double-digit annual hikes like this one are in the cards in the future. That means your dividend will snowball the longer you hold the stock.
Waste Connections is a fantastic business with a huge moat, but at current levels, shares are definitely not cheap. The latest quarterly results didn’t reveal major near-term catalysts that would deem such a premium valuation as worthwhile either. Shares currently trade at a 54.63 price-to-earnings multiple. That’s really expensive, even for a high-quality dividend-growth star like Waste Connections.
Although the stock has a top-notch dividend-growth runway, I’d be hesitant to recommend picking up shares at these levels. Add the stock to your radar and pick up shares if they pull back by a significant amount in the coming months.
Stay smart. Stay hungry. Stay Foolish.