Ever wondered if there was a group of stocks that reliably outperform the S&P 500?
Theoretically, such outperformance of a broad market index shouldn’t last, but one group has given the S&P 500 a run for its money:
The Dividend Aristocrats.
Dividend Aristocrats are stocks with 25 or more years of consecutive dividend increases. When a stock misses a dividend hike, it drops off the Aristocrats list. So, these high dividend-growth stocks come pre-screened for consistency.
Many reports claim that the Dividend Aristocrats have outperformed the S&P 500 over a period of many decades. I haven’t been able to fully verify these claims, but credible academic studies have shown that they experience smaller losses during bear markets than the indexes do.
What if there was a category of stock that was like Dividend Aristocrats but even better? With a longer dividend growth streak and even more stability? If such a group of stocks existed it would probably offer investors the best of low volatility and high returns imaginable. In this article I will explore two Canadian stocks that fall into that category: the TSX Dividend Kings.
Canadian Utilities
Canadian Utilities (TSX:CU) is a Canadian utility stock with more than 50 years of dividend increases under its belt. It supplies power to communities mainly in Western Canada, Australia, Puerto Rico and Mexico.
How has Canadian Utilities been performing lately?
Well, it certainly hasn’t been doing much growing. The company’s revenue and earnings are both relatively flat over 10 years (there has been a bit of growth over the last five years). On a somewhat brighter note, the company’s book value has grown by some 25% over the last 10 years.
The company’s debt to equity ratio is 1.45, which isn’t bad for a utility, though not as good as the other stock on this list (which is also a utility). One possible near term positive for CU is interest rate cuts. The Bank of Canada has been cutting rates, is expected to cut them more, and that will lower CU’s interest expenses.
Fortis
Fortis Inc (TSX:FTS) is another Canadian utility company. FTS stock has 51 consecutive dividend increases under its belt. It is aiming to keep the dividend hikes coming through 2028 at least.
Fortis has much better fundamentals than Canadian Utilities does. Its revenue and earnings are both up over 5- and 10-year periods, both in total and on a per share basis. Its debt/total equity ratio is 1.2. Its payout ratio is 74% – not low but well within the sustainable range. Finally, despite all of these advantages, FTS is arguably valued similarly to CU, with a slightly higher P/E ratio and a slightly lower price/book ratio than that company. Fortis has really stood the test of time, both as a dividend payer and as an overall company. For my money, it’s a sensible stock.
Foolish takeaway
Whether they boost total returns or not, regular dividends help investors sleep better at night. Some of the best dividend stocks out there are those with the longest dividend growth streaks. Dividend Aristocrats and Dividend Kings deliver good returns with low volatility. Overall, they have much to recommend them.
