Did you know that many Canadian stocks not only pay dividends, but increase them over time?
It’s true.
If you look at stocks in the financial and utilities sectors, many of them raise their payouts year in and year out.
In this article, I’ll explore two Canadian stocks that raised their payouts recently – both of them in the banking sector.
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TD Bank
The Toronto-Dominion Bank (TSX:TD) put out its fiscal second-quarter earnings release last month. The release beat expectations on both revenue and earnings, and also included an announcement of a $0.04 dividend increase, taking the payout from $1.08 per quarter to $1.12 per quarter. While the increase was not massive, it was nevertheless a vote of confidence in the company’s future. In the second quarter, TD achieved record earnings for the period (not its highest quarterly earnings ever, but its highest second-quarter earnings ever), with adjusted earnings per share [EPS] up 20% year-over-year (y/y). With results such as these, a small 3.7% dividend increase could be considered a reasonable way to throw a bit of the wealth back to shareholders without pushing the payout ratio.
Speaking of TD’s payout ratio:
Since the bank’s dividend hike was far lower than its earnings growth, its dividends as a percentage of earnings actually decreased! According to the online data service Finance Charts, TD’s payout ratio is currently 54%, down from the three year average of 59%.
So we’ve got TD growing its earnings, raising its dividend slightly, and lowering its payout ratio – what a package of value for a discerning investor to take advantage of.
Royal Bank of Canada
Royal Bank of Canada (TSX:RY) is another bank that raised its dividend recently. Just last month, it put out its fiscal second-quarter earnings, in which it revealed that it had grown its net income by 25% and its EPS by 27%. So, the company had plenty of room to raise its dividend, and it did. In its second-quarter release, RY announced that it would be increasing its dividend from $1.64 to $1.76, or 7%. This was an even bigger raise than TD did in the same period.
Much like TD, RY did not push it with its dividend increase. The 7% raise was only a small fraction of the 25% earnings growth, so RY’s payout ratio declined despite the higher dividend. This is exactly the kind of thing investors want to see from a bank stock. The fact that RY has a strong brand and high capital and liquidity ratios only helps matters.
Foolish takeaway
When a quality stock raises its dividend, it’s confirmation that management is confident in the company’s future. So it should come as no surprise that Canadian banks are raising their dividends left and right. Their earnings are growing, their risk management is solid, and their customers trust them. This is a recipe for continued success. And while Canada’s economy shows some signs of sluggishness right now, having entered a technical recession last quarter, the sluggishness is not so severe as to lead to mass defaults. Overall, the Canadian banking sector looks solid today.
