Young investors with long-term investment horizons should look to maximize their dividend-growth potential. Sure, it’s tempting to chase capital gains, but it’s dividends that tend to be huge needle movers over the course of time. Further, dividend growth is also a bigger deal than many beginner investors may make it out to be.
Sure, a 5-9% annual dividend increase may not seem like much, especially with inflation in the 4-5% range. That said, over the course of 20-30 years, these annual dividend hikes add up. Eventually, the yield based on your original invested principal could double. In essence, the top dividend growers (think the firms that hike payouts through horrid and euphoric times) tend to get better the longer you hold them. Arguably, they make for perfect stocks to hold for the truly long term.
In this piece, we’ll look at two all-star stocks that I believe could emerge as the market’s most influential dividend growers over the next several decades. Further, each name is also capable of big capital gains, providing new investors with a means to maximize their total returns relative to the risks they’ll bear.
As most other new investors chase quick gains, you should look to the boring companies that have histories of beating the market and spoiling investors with big dividend or distribution hikes.
Consider CP Rail (TSX:CP) and Alimentation Couche-Tard (TSX:ATD): two dividend-growth stocks that may very well evolve to become income studs for your portfolio in a few decades down the road.
CP Rail is a well-run railway that made a massive splash last year with the acquisition of Kansas City Southern. Many investors look to the firm as a means to score steady capital appreciation over time. Over the last five years, shares are up nearly 140%. That’s impressive in itself. When you factor in the dividend, CP stock becomes that much more interesting.
At writing, shares yield just 0.71%. That seems like a drop in the bucket compared to the capital-appreciation rate. That said, the dividend is poised to grow over time, perhaps at a greater rate once CP effectively integrates Kansas City Southern’s assets. Indeed, it’s hard not to be excited as the railway takes advantage of its dominant position with exposure to Mexico, Canada, and the U.S.
At 28.3 times trailing price to earnings, shares aren’t cheap. However, I think that CP’s dividend-growth prospects are tough to stack up against. The firm has the means to grow and will likely keep paying investors for their patience through the years.
Couche-Tard is a truly wonderful business that’s fresh off a new all-time high. The convenience store kingpin has the liquidity and expertise to make value-adding deals happen. Like CP, the dividend isn’t exactly the main attraction to ATD shares. At 0.84%, the yield is modest.
However, given the pace of earnings growth, I would look for the firm to continue raising its payout at a consistent rate. In 20 years, I think Couche-Tard could grow its way to becoming a passive-income powerhouse for any Tax-Free Savings Account retirement fund. For now, Couche is in full-on growth mode, as it looks for bargains in the convenience retail space.