You often see investment advisors talking about building a core portfolio or a retirement pool of dividend knights. These are the stocks worth accumulating at every dip or when you have funds to invest.
Why are dividend knights so popular in the investing world?
How dividend knights help build a growing nest egg
Dividend knights are companies that have been paying dividends for decades and growing them annually in every economic scenario. While the definition of the duration may change, the idea is to reassure investors that this company has helped investors earn an inflation-adjusted passive income through retirement.
Can any company give such consistent returns? Companies with low-risk business models, sticky demand, and an economic moat tend to become aristocrats. Canada’s strength is its oil sands field. It produces oil and gas at competitive rates and exports them efficiently to the United States through pipelines.
Banking, real estate investment trusts (REITs), and telecom sectors are emerging as future dividend knights. However, they are currently facing industry headwinds that have temporarily affected their dividend growth.
When building your retirement nest, invest small amounts annually, quarterly, or monthly. Dividend knights’ range-bound stock price helps you accumulate them at reasonable valuations and reduces your average price per stock.
The dividend knight with double-digit growth
This year, Canadian Natural Resources (TSX:CNQ) increased its dividend per share for the 25th consecutive year and has grown it at a compound annual growth rate (CAGR) of 21%.
How did this oil and gas producer become a knight, while the industry faced consolidation after the 2015 oil crisis and dividend cuts during the 2020 pandemic?
Canadian Natural Resources’s strength is its
- Long-life, low-decline asset base that generates more output at a lower cost.
- Diverse product mix of natural gas, natural gas liquids (NGLs), heavy crude oil, light crude oil, bitumen, and synthetic crude oil (SCO).
In December 2024, the company increased its debt by more than $8 billion to acquire more oil reserves. These reserves increased their output significantly and helped them generate more cash. The company used the cash to reduce debt by $1.4 billion in the first quarter and bought back shares. It assured investors that the company could pay a $2.35 dividend per share in 2025 even if the WTI crude price fell to US$50/barrel. It is because the company’s cost per barrel is mid-US$40 after including maintenance capital and dividends.
Canadian Natural Resources tackles lower oil prices by increasing production volumes and shifting the product mix to high-margin SCO. Its strong balance sheet and low-risk business model make it a stock to accumulate for its incremental payouts.
The dividend knight in the making
Telus Corporation (TSX:T) is a dividend knight in the making, with a history of growing dividends for 21 consecutive years at a 12.5% CAGR. The company achieved this by keeping its debt and payout within its long-term target. While there have been instances when debt and dividends exceeded the target, the company has taken steps to reduce debt and increase cash flow.
In the first quarter, its net debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio of 3.9 times exceeded its guided range of 2.2-2.7. The company is offloading non-core assets to reduce debt and tapping competitor networks to add more subscribers.
Its dividend-payout ratio of 76% also exceeded its guided range of 60-75%. Hence, the management has slowed the dividend-growth rate to 3-8% for the 2026-2028 period from 7-10% in the previous years.
These measures will help the company sustain dividend growth at a time when price competition and slowing immigration numbers are putting downward pressure on its average revenue per user. Once the company finds more ways to monetize its 5G infrastructure, it could accelerate dividend growth.
This stock also offers a dividend-reinvestment plan to help you compound your future passive income.
Final thoughts
A $5,000 investment in the above two knights every year can help you build passive income with higher purchasing power.
