Dividend-growth stocks are the place to find durable and rising streams of passive income. Dividend-growth stocks tend to provide a modest dividend yield. However, they grow their dividend alongside their earnings and cash flows.
Very often, their dividend-payout ratio barely fluctuates over time. This just means that their dividend sustainability remains constant because their growing earnings support their growing dividend rate.
Investors get the best of capital gains and income appreciation over time.
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Intact Financial: A strong dividend-growth stock for two decades
A great example of a quality dividend-growth stock is Intact Financial Group (TSX: IFC). It only has a modest 2% dividend yield. Yet, over the past decade, net operating earnings per share have risen by a 10% compounded annual growth rate (CAGR). Dividends per share have grown by a similar 10% CAGR in that time.
In fact, Intact has a 20-year record of consecutively growing its dividend. Since 2005, its dividend has risen 718%! Its stock is up 693% over the past 20 years. When you add back dividends, its combined total return is 1,154%!
The combined total return of dividends and capital appreciation has provided investors with a market-beating 13.3% compounded annual return over two decades.
Intact stock has recently pulled back by 12%. After a hard market for several years (rising premium pricing), Intact is seeing some softening in its U.K. and specialty divisions. These were meant to be growth areas for Intact, so the market was somewhat concerned.
The good news is that Intact has still delivered good overall results this year. Last quarter, earnings per share increased by 8% and book value per share increased 9%.
While it is still not the cheapest insurance stock, the company’s strong track record of growth and solid returns does deserve a premium. It has a dominant market share as Canada’s largest property and casualty insurer. The recent pullback could be a nice time to start nibbling on this quality long-term dividend-growth stock.
National Bank: A top-performing Canadian bank
National Bank of Canada (TSX: NA) has been another great stock for growing dividend passive income. Over the past 10 years, it has grown earnings per share by an 8.5% compounded annual rate. Its dividend per share has grown by a similar 8.6% CAGR! While it only pays a 3.3% dividend yield now, it has been a great total return story.
With a market cap of $59 billion, National Bank is the smallest of the Big Six Canadian chartered banks. However, it has provided the best overall returns amongst its banking peers.
Its stock is up 269% over the past 10 years. That is versus the next best-performing bank stock, Royal Bank of Canada, with a 170% capital return in that time. If you add in its growing stream of dividends, National Bank has delivered a 1,082% total return to shareholders over the decade.
National Bank focuses on niches where it has limited competition and can take a strong market share. It has been a dominant player in Quebec. Through its acquisition of Canadian Western Bank, it is expanding into western Canadian markets. While the acquisition will take time to integrate, it is likely to use its secret sauce to expand margins and gain market share.
This dividend stock has underperformed the other Canadian banks this year. It is not the cheapest bank, given its premium performance. However, I would be adding this dividend stock if it pulled back on any market-related turmoil.
