There’s a lovely moment when a dividend goes up and you realize the company’s offering you a raise without asking you to sit through a performance review. The first increase might buy lunch. Given years to build, those raises can change what a stock bought today contributes to your retirement budget.
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The cheque you can count on
Dividend growth compounds when each raise applies to the last, larger payment. Suppose a company pays $100 this year and increases the dividend by 5% annually. Next year it’s $105. The year after, it’s $110.25. Yet you’ve still got the same number of shares.
Reinvestment is another layer. Buying more shares with those payments can grow future income faster, although the number you can buy depends on the price each time. I’d model the raises first so I can see what the company has to deliver before giving reinvestment any credit.
I’d also distinguish the dividend growth rate from the return on the shares. Between 2016 and 2026, Fortis’s calendar-year dividends rose from $1.525 to $2.585 per share, including the declared December 2026 payment. That’s about 5.4% annualized. It measures the growth of the cheque. Your investment return also depends on what happens to the share price.
Timing belongs in the budget too. Plenty of Canadian dividend stocks pay quarterly. I can divide the income by 12 to see what it contributes to monthly spending, then keep the actual payment dates on a separate calendar.
FTS
Fortis (TSX: FTS) owns electricity and gas utilities. Those businesses make money by operating networks and earning approved returns on eligible investments. New substations and sturdier power lines don’t sound like a fast track to riches. They can, however, give the company more assets to earn from over time.
Its new five-year spending plan totals $32.2 billion. The payoff depends on getting projects built, earning regulatory approval and financing construction at a cost that leaves room for shareholders. If that goes well, a bigger network can support a bigger dividend.
The latest quarterly payment is $0.665, or $2.66 annualized. At $84.91 at writing, the starting yield was about 3.1%. I’d see that as an income stream to grow while I’m still earning, with enough time for several raises before I start spending it.
Give those raises five years
A $10,000 budget buys 117 shares for $9,934.47 before fees. If the current rate continues for four quarters, they pay $311.22 over a year. That works out to $77.81 per quarter, subject to rounding and the board continuing to declare the payment.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | ANNUAL DIVIDEND | ANNUAL TOTAL PAYOUT | FREQUENCY | TOTAL INVESTMENT |
|---|---|---|---|---|---|---|
| FTS | $84.91 | 117 | $2.66 | $311.22 | Quarterly | $9,934.47 |
Fortis targets annual dividend growth of 4% to 6% through 2031. Below is what five raises at each pace would do to those same 117 shares. There’s no reinvestment or additional purchase in the example, and the targets aren’t promises. If the 5% scenario plays out, year-five income works out to roughly 4% of the money originally spent. Someone buying the stock five years from now would have a different starting yield, since they’d pay whatever the shares cost then.
| ANNUAL DIVIDEND GROWTH | ESTIMATED ANNUAL INCOME AFTER FIVE RAISES |
|---|---|
| 4% | $379 |
| 5% | $397 |
| 6% | $416 |
If borrowing gets more expensive or regulators let Fortis recover less than expected, the company may have less cash available for those raises. Inflation also has its own compounding habit. I’d give the compound growth time to work while keeping other investments that don’t depend on utility rates and construction budgets.
Bottom line
I’d buy Fortis on the chance that the $311 I start with becomes more meaningful by the time I need it. A few years of ordinary raises can do a surprising amount of work while I’m busy doing mine.
