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Summary

  • SA has published many articles with respect to dividend growth investing, but they tend to focus on American companies. This article with look at dividend growers in Canada.
  • Buying Canadian companies provides geographical diversification with minimal added risk.
  • An American buying a Canadian company can have the normal 15% withholding tax waived provided it is purchased in a proper account.

There have been many articles as of late on Seeking Alpha related to dividends and dividend growth investing. I am a believer in dividend growth investing as a method for providing retirement income that is essentially inflation protected without having to sell any stocks. However, almost all of the articles focus exclusively on American companies within the S&P 500. This article will look at companies in Canada that are dividend growers and may perhaps be trading a better valuations than their American counterparts. Furthermore, Canadian companies are relatively easy for Americans to buy and the dividend income has the advantage of not having any withholding tax taken out assuming these companies are purchased in the proper account.

This model portfolio will be created using $100,000 equally distributed over 10 holdings. I do believe in diversification; however, I diversify through ETF's. The ETF core with proper assets allocated appropriately over the different categories would be supplemented by these 10 dividend growers.

I will take a moment to give a brief synopsis of each of the 10 companies as some of their names may not be as familiar to everyone as say a Coca Cola.

The Dividend Growers:

1. TransCanada Corporation (NYSE:TRP) - Energy infrastructure company providing pipelines for natural gas and oil. They also have some other power producing assets such as solar farms.

2. Fortis (OTCPK:FRTSF) - A regulated utility that distributes gas and electricity. Recently made two large purchases in the US that should help drive future earnings and dividend growth.

3. BCE Inc. (NYSE:BCE) - A telecommunications company that provides telephone, internet, TV and cell phone connections. Recently it's becoming much more focused on contest through its Bell Media division which should be the catalyst for growth.

4. Bank of Nova Scotia (NYSE:BNS) - A diversified financial institution that has a large degree of exposure to Latin America.

5. Toronto Dominion Bank (NYSE:TD) - Offers financial products and services in both Canada and the United States.

6. Suncor (NYSE:SU) - An integrated oil company operating in the oil sands.

7. Canadian Utilities (OTCPK:CDUAF) - A utility company that delivers electricity, natural gas and water.

8. Canadian National Railway (NYSE:CNI) - Operate about 20,000 miles of track that connect the Atlantic, Pacific and Gulf of Mexico.

9. Agrium (NYSE:AGU) - A vertically integrated producer and marketer of nutrients for the agriculture sector.

10. Saputo (OTCPK:SAPIF) - A dairy processor and cheese producer.

I personally think all of these companies easily fit under the 'buy and monitor' category and can be purchased for the very long-term. I am not going to focus exhaustively on each individual companies' growth profile as there are many articles in SA that touch on them; I am instead going to focus on their place in a dividend growth portfolio.

The first table will look at their dividend history and dividend growth characteristics, while the second table will look at some valuation metrics to determine which of the 10 are good buys at current prices.

Dividend Metrics:

Ticker

Yield

CAGR (5 year)

Dividend Payment History

Share Price

Shares

Dividend Income

FRTSF

3.80%

4.20%

42 years

$33.65

297

$379.77

TRP

3.39%

4.78%

10 years

$56.57

177

$339.44

BCE

5.10%

8.60%

31 years

$48.40

206

$508.49

BNS

3.50%

5.50%

122 years

$73.19

136

$348.38

SU

2.59%

18.10%

14 years

$43.25

231

$258.76

TD

3.27%

9.40%

45 years

$57.55

174

$327.45

CDUAF

2.72%

8.40%

42 years

$39.34

254

$271.79

CNI

1.33%

33.00%

18 years

$75.02

133

$132.70

AGU

3.22%

68.00%

15 years

$101.79

98

$321.21

SAPIF

1.58%

10.40%

15 years

$69.53

143

$157.10

TOTAL

3.05%

$3,045.09

This model portfolio has an overall yield of 3.05% and consists of stocks that have been paying dividends for many years such as BNS and FRTSF, as well as new dividend payers that have been growing their dividends at a quick pace like CNI and AGU.

Now we cannot expect such dividend growth to continue in the companies that have a high CAGR for the foreseeable future, but those companies do operate in sectors with high barriers to entry.

Looking at CNI for example, the payout ratio is rather low at 29% and has also seen its cash flow grow at a CAGR of 12% for the last 10 years. CNI's earnings have also grown at a CAGR of 12.9% over this same time period. I think it can be reasonably assumed that as CNI continues to grow so will its dividend; again not at the present rate since this growth rate was achieved through earnings growth and increasing the payout ratio, but at a rate comparable to cash flow growth.

Saying all of this, I would not be buying CNI at current levels. Its 10 year historic PE ratio is about 16 and it is trading at 22 today. This multiple expansion is likely a result of so many people looking for stable companies growing their dividend, but this strategy should not be executed at any price. I will be patient and wait for a pullback before adding any new money to CNI.

Two of the other companies in the table above with high CAGR are Suncor and Agrium. Both of these companies are involved in cyclical businesses; however, they are currently still trading at rather attractive levels. Suncor, like CNI, has achieved their dividend growth rate through a combination of cash flow growth and increasing their payout ratio. The also seem to be modeling their business using Exxon's strategy, but in my opinion have a much clearer growth profile. Furthermore, they are trading at a PE ratio of 17 which is lower than their 10 year average PE of 25. Although I think the days of SU being awarded a PE of 25 are over it is at least interesting at these levels.

In conclusion, I believe that turning attention towards Canada's large-cap sector can provide one's portfolio with a bit more diversification with no added risk.

Editor's Note: This article discusses one or more securities that do not trade on a major exchange. Please be aware of the risks associated with these stocks.

Source: A Dividend Growth Portfolio With Canadian Flair