One of the more popular methods of investing that seems to be building steam is that of dividend growth investing. The basic premise of this investment strategy is the idea that a portfolio will include only, or at least mostly, stocks that pay a dividend that grows on an annual basis. The purpose of this investing strategy is building a stream of passive income that can replace working income.
The dividend growth then is supposed to take out the fear that low to moderate inflation can bring up when looking at other investment products like bonds or CDs that pay out a consistent amount each quarter or year. The idea is that the dividend income will grow at a rate that equals or exceeds inflation so that the investor's standard of living will be stable or improve over time.
This is a great strategy. It's the main investment strategy I use; however, it will miss out on many growth stocks like Amazon (NASDAQ:AMZN) or Facebook (NASDAQ:FB) that go up exponentially after an initial public offering and can provide some massive capital gains. However, the strategy can provide just what a patient investor who wants to build wealth over time is looking for. When dividends are reinvested, the compounding process can really take off.
For example, an investor who buys AT&T (NYSE:T) may look at the 2 percent dividend growth rate of the past few years and think that this barely keeps up with inflation. They would be correct, but with a yield that's generally been between 4.5 and 6 percent in the past couple of years, an investor who reinvested their dividend would see a dividend growth rate that's much closer to 7 or 8 percent. Even if AT&T raises the dividend by the same 2 percent that's been common in recent years, an investor's dividend income will grow by a substantial amount.
One of the screening criteria that many dividend growth investors use is the length of the dividend growth history that a company has exhibited. Those companies that have increased their dividends for at least 25 years, known as Dividend Aristocrats, are especially prized in the dividend growth community. Seeking Alpha contributor David Fish does a great service by keeping up with companies that have raised their dividends in at least five straight years with his list of Challengers, Contenders, and Champions.
However, this criterion can be a bit deceptive at times. For US-based investors, the lists generally only look at companies that have increased dividends in US dollars. With the fluctuations one currency, including the dollar, can experience when compared with the currencies of other nations, there are many instances when foreign companies that are great investment opportunities will get left out of a dividend growth screening because the dividend did not increase in strict dollar terms.
One example of a great company that many dividend growth investors might ignore is Bank of Nova Scotia (NYSE:BNS), also known as Scotiabank. Obviously, this is a stock that is based in our great neighbor to the north, Canada. BNS has a great history of paying dividends.
A quick perusal of dividend.com, which is a website that is dedicated to giving all sorts of valuable information related to stock pricing and dividend payouts, shows that Scotiabank has only raised its dividend over the past year. This is not the case when we look at the company's investor web page and realize that the dividend gets paid out in Canadian dollars.
By looking at the aforementioned company website, we learn that Scotiabank has paid a dividend every single year since 1833. This is a period of time that includes the US Civil War, both World Wars, Vietnam, and the War on Terror. It includes time in which Canada was a crown possession of England through its inclusion in the Commonwealth as an independent nation.
It also includes various economic downturns like the Great Depression and the Great Recession that have impacted countries around the globe. Through all of them, BNS has paid a dividend without fail. There have also been six stock splits over this period of time, the most recent of which was a 2-for-1 in 2004.
When we look at the dividend payout ratio, BNS pays out 48.4 percent according to dividend.com. This is a pretty sustainable payout, as less than one-half of net income goes to paying shareholders. This payout can be compared with one of the more popular of the US-based bank stocks. Wells Fargo Company (NYSE:WFC) has a payout ratio of 37.6 percent.
Additionally, WFC is shown as having raised dividends for four straight years after having cut its dividend from $0.34 a share to $0.05 in the throes of the Great Recession. The same website shows that BNS last cut its dividend in 2013, but this is only true if we look at the payout in dollars.
According to the investor relations page, in 2012, BNS paid out $2.19 in dividends, but this is measured in Canadian dollars. In 2013, the payout was $2.39, which is most definitely not a dividend cut as shown on dividend.com. In fact, with the exception of 2009 and 2010, the dividend has grown every single year since 2005, as shown by the chart below:
Source: Scotiabank shareholder information site
Since 2005, the dividend that Scotiabank investors have realized has more than doubled, and there has only been one pause when looking at the dividend in Canadian dollars. Back in 2005, the Loonie was trading at a discount to the greenback. By 2012, the two currencies were nearly identical in valuation. In the past couple of years, the US dollar has been much stronger than the Canadian version.
The bumps have tended to smooth out over time in currency trades, and even a US investor who might not like getting a payout in Canadian dollars has definitely seen their dividend income grow over time. Additionally, as seen from the information below, the dividend has been increased twice per year over the past four years:
Scotiabank has been a solid dividend payer for nearly two centuries. Dividend cuts have been rare, and US-based investors could benefit from the increased payout that should be possible with the relatively low payout ratio.
Some screening criteria that US investors utilize would not show this great company as a solid investment because of the currency fluctuations. However, this concern alone should not be an obstacle for those who might have interest in owning BNS. Investors would do well to take a similar approach when researching other foreign companies, as they generally pay their dividends in the currencies of their respective nations.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am not a licensed financial professional. This article is only for educational/entertainment purposes and should not be construed as a recommendation to buy or sell any securities. As losses up to and including all capital invested can occur, be sure to do due diligence and check with a financial professional before investing in securities.