Dividend stocks tend to be relatively safe investments for a few reasons. Firstly, many dividend stocks tend to earn recurring, contracted, or regulated revenues/earnings. Many have stable operating models, so they can afford to pay regular dividends.
Secondly, any stock that pays a dividend needs to demonstrate discipline about how it manages its balance sheet and cash flows. Paying a dividend constrains capital, so managers need to ensure their business operates efficiently and prudently.
Thirdly, if they wish to grow their dividend, they also need to grow their earnings/cash flows in a predictable manner. If you want safe dividends, dividend-growth stocks can be some of the best. If you want safe and growing dividends, check out these three Canadian stocks.
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This stock has grown its dividend by over 4,500%
Canadian National Railway (TSX: CNR) has increased its dividend by 4,572% since it started paying a dividend in 1996. Over the past 20 years, it has grown its dividend by a 12.6% compound annual growth rate (CAGR).
It only yields around 2%, but this company has demonstrated a great dividend-growth record. CNR has a very solid, defensive business. In many regions of Canada, it is the only viable network to move bulk goods.
As a result, the company has a great competitive moat. This allows it to have very strong pricing power that results in steady annual earnings growth.
CN has a dividend-payout ratio of 42%. This means it has ample room to keep paying/growing its dividend while also re-investing in its business. CN stock provides a great combination of growth and dividend income.
A safe tech stock with a long dividend history
Like CNR, Thomson Reuters (TSX: TRI) does not pay a large dividend. It only yields 1.5% today. Yet it has been paying and growing its dividend ever since 1989. Its current quarterly dividend is 375% larger than it was when it first started paying a dividend.
This stock is an industry leader when it comes to providing legal, tax/accounting, and government data, content, and software services. 79% of its total revenues are recurring and it has high +90% customer retention rates. Once this company’s services are embedded in a business or organization, they are very hard to replace.
Right now, this dividend stock has an earnings payout ratio of 61%. The company still has ample opportunities to re-invest in growth, so a smaller, steadily growing dividend seems like the right fit for this business. This is not a cheap stock, but it has a delivered strong +25% compounded total returns over the past five years.
A safe and steady stock for income
No list about safe dividends would be complete without Fortis (TSX: FTS) stock. It is perhaps not growing as fast as the above companies. Yet it does pay a slightly higher dividend with a yield of 3.8%.
With a market cap of nearly $29 billion, Fortis is one of Canada’s largest utilities with distribution and transmission operations across North America. The company has an incredible 49-year track record of consecutive annual dividend growth.
99% of its operations are regulated, so it earns a predictable baseline of income annually. The company expects to grow by around 6% a year for the coming five years. It believes this should translate into 4-6% annual dividend growth.
Fortis stock is a steady-as-it-goes investment. Its dividend-payout ratio sits comfortably below 80%. That is expected to drop, as it grows earnings slightly faster than its dividend rate in the near term. All around, this is a very safe business to buy and hold for long-term secure dividend income.
