A 10% raise would improve most people’s week. Receiving one from an investment feels especially satisfying because you didn’t have to negotiate for it. You kept owning the shares, and the business increased the amount it sends you.
The more impressive part is doing it repeatedly. A company that keeps raising its dividend needs a service customers continue paying for, enough profit to fund the increase, and enough discipline to leave money in the business. The cheque gets the attention, but it’s the business that makes it possible.
That’s why dividend growth can be such an appealing way to invest. You can begin with an affordable position and let improving earnings support a gradually larger payment. Given enough time, an unremarkable starting amount can become much more useful.
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Incredibly essential
Waste Connections (TSX: WCN) collects, processes, and disposes of waste. Homes and businesses need that service whether the stock market is having a good month or a bad one. Its collection routes and disposal facilities also take time and money to build.
That can help an established operator keep customers and earn sensible returns. More customers along an existing route can improve the economics because the truck and driver are already in the area. Owning disposal capacity adds another service that customers need after collection.
The company announced a 10% quarterly dividend increase on October 21, taking the payment from US$0.35 to US$0.385. It’s the 16th consecutive double-digit annual increase since payments began in 2010. The starting yield still sets the pace. At 0.8%, a $10,000 investment produces only about $80 in its first year before taxes and currency effects. Several generous raises won’t turn that into a large retirement payment overnight. Yet Waste Connections is still appealing because a growing business can lift both the payment and the value of the shares over a long holding period.
Profit support
Waste Connections’ third-quarter adjusted earnings rose to US$1.58 a share from US$1.44 a year earlier. The new dividend uses roughly 24% of that latest quarterly profit. That leaves substantial earnings available for the company’s other needs, even allowing for the adjustments between reported and adjusted results.
This is the kind of dividend growth I like. A generous increase comes from a relatively small share of profit, giving the business a chance to keep expanding without making the payment feel stretched from the outset.
There’s a straightforward compounding benefit, too. An annual US$100 payment growing 10% each year would become about US$259 after 10 increases. That illustrates what continued growth could accomplish. It doesn’t assume Waste Connections will repeat the same increase every year.
Price in patience
Shares recently closed at $261.69, so again this dividend yield sits at only about 0.8%. That small starting yield is the trade-off. Waste Connections suits someone building wealth over years more than someone trying to cover a large bill next month. You’re paying for an established business and its ability to grow, which means future earnings need to justify the price.
Fuel, wages, and acquisition costs can still create problems. Commercial waste volumes can weaken when business slows. I would buy gradually and keep the position alongside companies with different sources of earnings, instead of treating an essential service as a guarantee of a rising share price.
Bottom line
I like Waste Connections for a long-term Canadian stock portfolio that values a growing payment and a durable business. The next few years of earnings growth will do much more for a new investor than the next dividend alone. Owning a small share of something people keep needing can be a very satisfying place to start.
