Dividend-growth stocks can make for excellent investments if you choose them correctly. The best dividend growth stocks tend to increase their dividends as they increase their income or cash flows. Investors get the double benefit of capital appreciation and income growth. It can make a very potent investment strategy.
However, be cautious of dividend growth stocks that aren’t sustaining their dividend growth from cash flows. Stocks in sectors like renewables, telecommunications, real estate, and infrastructure have been particularly guilty of doing this.
Many stocks have made the mistake of financing their dividend by levering their balance sheet with extra debt or equity. This strategy works when times are good. However, it can be dangerous when the business hits a rough patch.
Beware of unsustainable dividend growth stocks
BCE (TSX:BCE), with its unsustainable 12% dividend, is a perfect example. Last year, everyone knew BCE had way too much debt. Everyone knew its business was going to face a downturn.
Yet, management still increased the dividend. Its stock has dropped 28% in the past year and a further 52% over the past three years. A miraculous surge in cash flow is not likely any time soon. However, a dividend cut is. Until it gets its balance sheet in order, this stock will likely stay depressed.
You don’t want that kind of dividend growth. You are better to sacrifice dividend yield for long-term capital preservation (and hopefully capital growth).
If you are wondering what stocks to buy for solid dividend growth, here are three.
National Bank
National Bank of Canada (TSX:NA) has grown its dividend per share by an 8.65% compounded annual growth rate (CAGR). National has been able to do that because it has grown earnings per share (EPS) by a 9.95% CAGR in that same time. Its payout ratio has declined over the decade.
National has a great record of smart capital management. It has focused on its niche markets of expertise. That has helped it preserve a solid balance sheet and a steady growth profile. Its CWB investment could open a new leg of growth.
It yields 3.8% right now after its stock declined 9% year to date. If its stock declined anymore, it could be a good buy.
Intact: A long-term dividend-growth stock
Intact Financial (TSX:IFC) has grown its annual dividend per share by a 9.6% CAGR in the past 10 years. EPS has risen by 10% CAGR in that period. Its stock is up 239% over the decade. It yields 1.86% today.
Intact has become Canada’s largest property and casualty insurer. It is also becoming a substantial player in the United Kingdom.
The company consistently has strong returns on equity and below industry operating ratios (a good thing). It’s a safe and solid bet to hold through a trade battle or not.
Canadian Natural Resources
Canadian Natural Resources (TSX:CNQ) is a dividend growth legend in Canada. It has increased its dividend annually for 25 consecutive years. If that were not an astounding feat, it has grown its dividend per share by a 21% CAGR in that time.
Not only is CNQ Canada’s largest energy producer, but it is also one of its best producers. It has decades of reserves for production. It is a low-cost, efficient operator. Lastly, it has a very strong balance sheet.
Recently, the company has made several great opportunistic acquisitions to cement itself as a global energy giant. The company continues to find ways to reward shareholders through buybacks and rising dividends. It’s a great buy on any pullback. It yields 5.4% right now.
