Stocks that regularly grow their dividends tend to be better long-term investments than those that just pay high dividend yields. The most prudent companies grow their dividends per share as their earnings per share (EPS) or free cash flow per share (FCFPS) also grow.
It is a way of rewarding shareholders, maintaining capital discipline, and still ensuring growth and investment in the business. You will have to sacrifice dividend yield for the best quality businesses. However, it is worth in the long run.
A stock with a small yield but a fast-growing dividend can become a substantial income stream over time. The best part is that you are much more likely to also earn strong capital returns with this strategy.
As a result, investors get a great one-two punch. If you are looking for stocks that could have substantial dividend hikes in 2024, here are three to think about today.
An energy stock with monstrous dividend growth
If you want to project future dividend growth, past dividend growth can sometimes be a good indicator. Canadian Natural Resources (TSX:CNQ) has an incredible dividend track record. It has increased its annual dividend for 24 consecutive years by a 21% compound annual growth rate (CAGR).
For an energy stock, that is incredible. Oil and gas are volatile and cyclical commodities. Canadian Natural has compiled a portfolio of assets with multiple decades of energy reserves. It could easily double its production capacity if it had pipeline egress.
Canadian Natural just hit its long-term $10 billion debt target. It plans to distribute all its excess cash to shareholders.
So, that means big share buybacks, dividend increases, and special dividends are on the table going forward. It just increased its base dividend by 5% in February 2024. It yields 3.8% right now.
A tech stock with a fast-growing dividend
Enghouse Systems (TSX:ENGH) is a stalwart in the Canadian technology scene. It was one of the first Canadian companies to utilize a software acquisition and consolidation strategy.
Recently, growth has moderated due to increased competition and macro issues. The stock hasn’t performed well. Despite, the business continues to generate a massive amount of cash. Every quarter it kicks out between $18 million and $30 million of excess cash.
Enghouse is sitting with $240 million of net cash on its balance sheet. It continues to hold that largely for acquisitions. However, Enghouse has steadily been growing its dividend.
Over the past 10 years, it increased its annual dividend by 18% CAGR. It increased its dividend by 18% in its most recent quarter. It yields 3.5% today.
A financial stock with a low payout ratio
With a market cap of $3.2 billion, EQB (TSX:EQB) (also known as EQ Bank) may not be a part of the “Big Six” Canadian bank list. However, it has been one of the best-performing bank stocks. Its stock is up 133% in the past five years.
In that period, its EPS is up 92% and its annual dividend per share has increased by 104%. The bank has done a good becoming a contender with its online-only banking products and specialized loans catered to new Canadians.
The bank raised its dividend by 12% last year. With an earnings payout ratio of 11%, it has ample room to keep increasing its dividend. With a growing population, EQ Bank still has a great opportunity to take market share. It yields 2% today.
