Dividend Growth Investors Should Look To Canada

by: Bayesian Investing

Most of my American friends' eyes glaze over when I talk about Canadian dividend stocks. Perhaps it’s because all that comes to mind is an endless parade of energy trusts and an equally endless debate about their tax status. Or maybe they are just tired of hearing about those boring but steady banks that we Canucks can’t seem to help being smug about.

I implore you, my fellow dividend growth investors, to pay attention if just for a moment. Canada has some excellent stocks providing double digit dividend growth rates and impressive total returns -- returns that must leave most U.S. dividend growth stocks with a bruised ego. With that little patriotic dig behind us, I humbly submit my following two highest conviction picks for Canadian dividend growth stocks.

Home Capital Group (OTC:HMCBF)

This midcap company provides mortgage lending, deposit, retail credit and credit card issuing services. Now, before you start thinking it would just be easier to burn your money than invest in a financial institution involved in the house sector -- hear me out! Home Capital Group isn’t a highly levered company with a bunch of risky, low-quality loans, derivates or other financial voodoo on their books. In fact, they don’t even have any debt! So typically boring for a Canadian company, hey? Sure it made over $510 million dollars last year – with a nifty 25% operating margin – but I am sure it just enjosy being the nice company that lends money to credit-worthy folks to buy their dream house.

If some of those scary stories from across the pond have you worried about another financial crisis, there is no reason to fret about this investment. Even in the financial apocalypse that was 2007-2009, Home Capital Group grew its net income by an astounding 62%. In the height of the housing meltdown, HCG’s dividend was raised twice and it has still managed to deliver a sizzling five year dividend growth rate of 23%. This fine stock shows no signs of slowing down the gravy train either, with a 25% bump to this year’s dividend, a very low dividend pay out ratio and projected double digit EPS growth in the future.

Home Capital Group Key Metrics

5 Year Total Return (Annualized)


Dividend Yield


5 Year Dividend Growth Rate


Dividend Pay Out Ratio


Return On Equity


Click to enlarge
Click to enlarge

Analysts have gone into hyper-bull over this stock: Zacks ranks this stock as a Strong Buy and the median analyst target is $61.50 – implying a 32% upside.

Canadian Natural Resources (NYSE:CNQ)

I know, I know, yet another one of the plethora of Canadian oil stocks doesn’t sound very interesting, or original, for that matter, but I believe this stock should be on every dividend growth investor’s radar screen.

At a time when most of the world’s major oil companies are struggling with finding new reserves, Canadian Natural Resources has over 6.9 billion barrels of oil reserves with a production life of over half a century. To get to these massive reserves, Canadian Natural Resources doesn’t have to do any deep water drilling or explore for oil in countries with hard-to- pronounce names: over 87% of its proven reserves are in North America, mostly in friendly little Canadian provinces like Alberta and Saskatchewan, so there are no worries about governments that enjoy the occasional nationalization.

The stock has delivered a rather respectable total return of around 600% this past decade but the party is only getting started. The company has invested over ten billion dollars in infrastructure in the Canadian Oil Sands to increase production and this still barely scratches the surface of the vast oil-producing land it owns. The company intends to drill over six hundred new wells this year alone.

Even with pouring a fortune into expanding production every year, the company has been kind enough to find some cash to return to its shareholders. The 1% yield doesn’t sound very exciting but let’s imagine the future, shall we? With a 5 year dividend growth rate of almost 20%, the yield on cost will double every four years. With a dividend payout ratio of only 6% and projected EPS growth of – and no, this is not a typo – 50% next year, the company will have no problem keeping up its hectic pace of dividend increases.

Let’s get a little wide-eyed and gaze even farther into the future. Barring calamity, or that mythical alternate energy source everyone is looking for, at some point most of Canadian Natural Resource’s land will have been developed and will overflow with sweet, sweet oil. Just imagine: CNQ no longer needing to spend most of its cash on increasing production and becoming one of the largest oil producing companies in the world. What will the yield on cost be then? I have no idea but I want to be on the receiving end of that dividend check!

I am knowledgeable about the companies I own, so if you have questions or want more details please use the comment sections to ask and I will do my best to answer them all.

Go to Part ll

Disclosure: I am long OTC:HMCBF, CNQ.