6 Canadian Dividend Growth Stocks Increasing Dividends

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Includes: APYRF, BMO, ENB, LRCDF, NTIOF
by: Dividend Growth Investing & Retirement
Summary

Each month I update readers of all the dividend increases in the Canadian Dividend All-Star List along with a summary of these companies.

Tracking recent dividend increases can be a good way to generate new dividend growth stock ideas.

This month there were 6 dividend increases with the largest increase coming from Enbridge Inc. at 10%.

This post originally appeared on Dividend Growth Investing & Retirement.

Each month I update readers of all the dividend increases in the Canadian Dividend All-Star List (Canadian companies that have increased their dividend for 5 or more years in a row.) along with a summary of these companies.

Tracking recent dividend increases can be a good way to generate new dividend growth stock ideas as dividend increases can be a sign from management that they feel good about the future.

Enlightened investors have grasped the point that it is usually one condition - higher earnings or management's reasonable expectation of higher earnings - that prompts a dividend increase."

Source: Geraldine Weiss/Janet Lowe, Dividends Don't Lie, Chapter 2

This month there were 6 dividend increases with the largest increase coming from Enbridge Inc. (NYSE:ENB) (ENB.TO) at 10%.

December 2018 Dividend Increases in the Canadian Dividend All-Star List

  1. Enbridge Inc. - 10.0% Dividend Increase
  2. National Bank (OTCPK:NTIOF) (NA.TO) - 4.8% Dividend Increase (2nd increase in 2018)
  3. Bank of Montreal (NYSE:BMO) (BMO.TO) - 4.2% Dividend Increase (2nd increase announced in 2018)
  4. Allied Properties Real Estate Investment Trust (OTCPK:APYRF) (AP-UN.TO) - 2.6% Dividend Increase
  5. Granite Real Estate Investment Trust (GRT-UN.TO) - 2.6% Dividend Increase
  6. Laurentian Bank of Canada (OTCPK:LRCDF) (LB.TO) - 1.6% Dividend Increase (2nd increase announced in 2018)

What is the Canadian Dividend All-Star List (CDASL)?

The CDASL is an excel spreadsheet with a lot of stock information that is typically used as a starting point to identify and screen Canadian dividend growth stocks. The list has been updated monthly since early 2013 and it has come to be one of the most popular resources of my website.

OK, now on to the dividend increases…

1. Enbridge Inc. - 10.0% Dividend Increase

Enbridge operates the world's longest crude oil and liquids transportation system and is the North American leader in the gathering, transportation, processing and storage of natural gas. They also have an increasing involvement in power transmission.

Enbridge is Canada's largest natural gas distribution provider, with about 3.7 million retail customers in Ontario, Quebec, New Brunswick and New York State.

Source: Enbridge - About Us - Our Strategy

Enbridge Dividends

Enbridge Inc. which has a dividend streak of 23 years recently increased their quarterly dividend 10.0% from $0.6710 CAD to $0.7380 CAD. This dividend increase comes into effect with the dividend recorded on Feb 15, 2019.

The dividend yield as of January 9, 2019, was 6.5%, and they have 5- and 10-year average annual dividend growth rates of 16.3% and 15.1%, respectively.

Enbridge Dividend Policy & Future Dividend Growth

Enbridge has a target payout ratio of 65% of distributable cash flows (DCF) and is guiding 10% dividend and DCF growth next year (in 2020).

Source: 2018 Annual Investor Day December 2018 Presentation

Source: 2018 Annual Investor Day December 2018 Presentation

Post-2020 they are guiding 5-7% growth in DCF.

If they meet their adjusted DCF growth target of 10% to 2020 and then 5-7% post-2020, then they can likely continue dividend growth of around the same (5-7%) or less post-2020.

That said, I consider Enbridge to have a high target payout ratio. Normally I like a company to have a 60% EPS payout ratio or lower, for utilities I'll go up to 70%. You could make the argument that Enbridge acts similar to a utility as almost all their earnings are from regulated sources and fairly reliable, but Enbridge's target payout ratio is based on DCF and not EPS. Using DCF is less conservative than using EPS which is why I think this is a high payout ratio.

You can still have a high payout ratio and have dividend growth, but it's a riskier investment. In these high payout ratio scenarios, I want to see strong financial strength before investing.

Overall, I'm still expecting Enbridge to continue increasing their dividend, but I just consider it riskier dividend growth.

Value Line is estimating 5.5% annual dividend growth over the next 3-5 years with 4.5% earnings growth.

Source: Enbridge Nov. 30, 2018, Value Line Report

Enbridge Financial Strength & Valuation

Value Line gives Enbridge a "B++" rating for financial strength. 3 of the 4 rating agencies give Enbridge a BBB+ or equivalent credit rating. Moody's gives the company a Baa3 (BBB- equivalent) credit rating which is two notches below the BBB+ or equivalent I typically like to see.

Source: Enbridge

The company appears to have OK financial strength, but it's a bit below what I like to see because of the Moody's rating.

Using the dividend yield as a valuation tool suggests that Enbridge is undervalued as the current yield of 6.5% is historically quite high for the company.

Morningstar rates them a wide moat stock with a five-star valuation as they are currently trading below their fair value estimate of $62 CAD (To be considered a 5-star undervalued company the price has to remain under $43.40).

TIP - Check to see if your broker provides access to Morningstar. I use Questrade which has free access to Morningstar research.

Enbridge Final Thoughts

I own shares of Enbridge which I bought back in January 2016 at around $42 CAD. Back then the yield was around 5%. At the time, I thought was high. Now Enbridge's yield is 6.5% so I've been struggling to decide if I should buy more.

On the one hand, Enbridge is a wide moat stock, trading at what appears to be a cheap valuation, with a long dividend history, high dividend growth, and a high yield. On the other hand, the financial strength leaves a little to be desired, and the payout ratio is on the high side.

I think Enbridge will continue increasing the dividend, but ultimately, I'm passing on the stock right now. Had Moody's given them a Baa1 rating instead of Baa3 then I think I'd be OK with the higher payout ratio, but that's not the case here.

I think there is a very good chance I'll look back in 3-5 years and kick myself, but hey, you can't win them all. As a long term buy and hold dividend growth investor it is important to pay attention to the financial strength and dividend safety of a stock when investing.

I really struggled with this decision, so I'd be interested to hear your own thoughts on Enbridge.

Disclosure: I own shares of Enbridge (ENB.TO).

2. National Bank - 4.8% Dividend Increase

Usually, when investors think of Canadian banks they think of the "Big 5," but with a history dating back to 1860, the #6 bank in Canada is worth your consideration too.

National Bank is the leading bank in Quebec and has branches in almost every province in Canada as well as numerous representative offices, subsidiaries and partnerships, through which it can serve clients in the United States, Europe and other parts of the world.

They provide a range of financial services that include: banking and investment solutions for individuals and businesses as well as securities brokerage, insurance and wealth management services.

Source: 2018 Annual Report

National Bank of Canada Dividends

National Bank which has a dividend streak of 9 years recently increased their quarterly dividend 4.8% from $0.6200 CAD to $0.6500 CAD. This dividend increase comes into effect with the dividend recorded on Dec. 31, 2018.

National Bank of Canada has been increasing their dividend twice a year, so if you factor in both increases, then the annual increase was 8.3% ($0.60 quarterly dividend to $0.62 and then most recently to $0.65).

The dividend yield as of January 9, 2019, was 4.4%, and they have 5 and 10-year average annual dividend growth rates of 7.4% and 7.2%, respectively.

National Bank Dividend Policy & Future Dividend Growth

National Bank has a medium-term payout ratio target of 40-50%.

Source: 2018 Annual Report

If they meet their EPS growth target of 5% to 10% then I'd expect dividend growth around the same. Value Line is estimating 6.5% annual dividend growth over the next 3-5 years with 8.5% earnings growth.

Source: Nov 9, 2018, Value Line National Bank of Canada Report

National Bank of Canada Financial Strength & Valuation

Value Line gives National Bank of Canada a "B++" rating for financial strength, and the 4 rating agencies give the bank A or higher credit ratings. The company appears to have good financial strength.

Source: National Bank Investor Relations website - Capital and Debt Information

Using the dividend yield as a valuation tool suggests that they are reasonably priced. If you were looking for a bit better value, you might wait for a higher yield though.

Morningstar rates them a narrow moat stock with a four-star valuation as they are currently trading below their fair value estimate of $70 CAD.

Tip - Check to see if your broker provides access to Morningstar. I use Questrade which has free access to Morningstar research. (I've been using Questrade for years and I consider them the best low-cost broker in Canada)

Final Thoughts

The Big 6 Canadian banks are worth considering as they have similar appealing profiles: high, but not too high dividend yield with decent dividend growth prospects and strong financial strength. All 6 are currently rated as 4-star stocks from Morningstar too.

National Bank of Canada (4.4% yield) is a quality bank, but you can get a higher starting dividend yield with other narrow moat banks: Bank of Nova Scotia (NYSE:BNS) (BNS.TO) (4.8% yield) or CIBC (NYSE:CM) (CM.TO) (5.2% yield). Bank of Montreal; another narrow moat stock, offers a 4.4% yield. If you want a wide moat stock look at Royal Bank of Canada (NYSE:RY) (RY.TO) (4.1% yield) or Toronto Dominion Bank (NYSE:TD) (TD.TO) (3.9% yield).

It all comes down to picking the one or more that suit you best.

Disclosure: I own shares of National Bank of Canada and Bank of Nova Scotia.

3. Bank of Montreal - 4.2% Dividend Increase

Bank of Montreal is one of the "Big 5" Canadian banks and is Canada's oldest bank having been established in 1817. In 1829 BMO started paying dividends and hasn't stopped since, giving it the longest-running dividend payout record of any company in Canada.

BMO is a diversified financial services provider based in North America (Canada and the United States with a focus on six U.S. Midwest states - Illinois, Indiana, Wisconsin, Minnesota, Missouri and Kansas) which also operates in select global markets in Europe, Asia, the Middle East and South America.

They provide a broad range of personal and commercial banking, wealth management and investment banking products and services.

Source: 2017 Annual Report

Source: 2018 Annual Report

Bank of Montreal Dividends

Bank of Montreal which has a dividend streak of 7 years recently increased their quarterly dividend 4.2% from $0.9600 CAD to $1.0000 CAD. This dividend increase comes into effect with the dividend recorded on Feb 01, 2019.

BMO has been increasing their dividend twice a year, so if you factor in both increases, then the annual increase was 7.5% ($0.93 quarterly dividend to $0.96 and then most recently to $1.00).

The dividend yield as of January 9, 2019, was 4.4%, and they have 5- and 10-year average annual dividend growth rates of 5.2% and 3.0%, respectively.

BMO Dividend Policy & Future Dividend Growth

BMO's policy is to pay out 40% to 50% of its earnings in dividends to shareholders over time. Currently, the payout ratio is in that range.

Source: 2018 Annual Report - Financial Highlights. Amounts shown above are as of October 31, 2018

For BMO's 2018 fiscal year end (Oct 31st) they had a 46.2% payout ratio and 41.9% if the adjusted EPS are used.

Source: 2018 Annual Report

If they meet their adjusted EPS growth target of 7% to 10% then I'd expect dividend growth around the same. Value Line is estimating 5.0% annual dividend growth over the next 3-5 years with 6.0% earnings growth.

Source: Nov 9, 2018 Value Line BMO Report

Bank of Montreal Financial Strength & Valuation

Value Line gives Bank of Montreal a "B++" rating for financial strength, and the 4 rating agencies give the bank A+ or higher credit ratings. The company appears to have strong financial strength.

Source: Bank of Montreal Investor Relations website - Fixed Income Investors

Using the dividend yield as a valuation tool suggests that they are reasonably priced. If you were looking for a bit better value, you might wait for a yield of 5% or more.

Morningstar rates them a narrow moat stock with a four-star valuation as they are currently trading below their fair value estimate of $105 CAD.

Tip - Check to see if your broker provides access to Morningstar. I use Questrade which has free access to Morningstar research. (I've been using Questrade for years and I consider them the best low-cost broker in Canada)

Bank of Montreal Final Thoughts

Any of the Big 5 Canadian banks are worth considering as they have similar appealing profiles: high, but not too high dividend yield with decent dividend growth prospects and strong financial strength. All 5 are currently rated as 4-star stocks from Morningstar too.

Bank of Montreal (4.4% yield) is a quality bank, but you can get a higher starting dividend yield with other narrow moat banks: Bank of Nova Scotia (BNS.TO) (4.8% yield) or CIBC (CM.TO) (5.2% yield). If you want a wide moat stock look at Royal Bank of Canada (RY.TO) (4.1% yield) or Toronto Dominion Bank (TD.TO) (3.9% yield).

It all comes down to picking the one or more that suit you best.

Disclosure: I own shares of Bank of Nova Scotia.

4. Allied Properties Real Estate Investment Trust - 2.6% Dividend Increase

Allied Properties Real Estate Investment Trust is a REIT that focuses on urban office properties, primarily in the Toronto and Montreal area.

Source: November 2018 Q3 Investor Presentation

Allied Properties REIT Dividends/Distributions

Allied Properties Real Estate Investment Trust which has a dividend streak of 7 years recently increased their monthly dividend 2.6% from $0.1300 CAD to $0.1333 CAD. This dividend increase comes into effect with the dividend recorded on Dec 31, 2018.

The dividend yield as of January 9, 2019, was 3.6%, and they have 5 and 10-year average annual dividend growth rates of 2.8% and 1.8% respectively.

Allied Properties REIT Financial Strength & Valuation

They are only rated by one of the credit rating agencies, DBRS, which currently gives Allied Properties REIT a BBB (low) rating.

Source: 2017 Annual Information Form & DBRS

This is two notches too low for me, as I like to see a BBB (high)/BBB+/Baa1 rating or higher from the rating agencies.

Using the dividend/distribution yield as a valuation tool suggests that they are over-valued as their current yield of 3.6% is historically low.

Allied Properties REIT Final Thoughts

Allied Properties REIT's recent dividend increase was underwhelming at 2.6%. This low increase is consistent with its historical dividend growth rates as both the 5- and 10-year average annual dividend growth rates are under 3% too.

Additionally, the yield at 3.6% is historically low and the credit rating is too low for me at BBB (low).

This isn't a REIT I'm interested in.

5. Granite Real Estate Investment Trust (GRT-UN.TO) - 2.6% Dividend Increase

Granite REIT is Canada-based and engaged in the ownership and management of predominantly industrial properties in North America and Europe. Granite owns approximately 30 million square feet and 92 properties.

Magna International Inc. [TSE:MG] (NYSE:MGA) and its operating subsidiaries are by far their largest tenant with about 57% of revenue coming from this one major customer as of Q3 2018.

Source: 2017 Annual Report

Granite Real Estate Investment Trust Dividends/Distributions

Granite Real Estate Investment Trust which has a dividend streak of 8 years recently increased their monthly dividend 2.6% from $0.2270 CAD to $0.2330 CAD. This dividend increase comes into effect with the dividend recorded on Dec 31, 2018.

The dividend yield as of January 9, 2019, was 5.0%, and they have 5 and 10-year average annual dividend growth rates of 5.3% and 15.6% respectively.

The 5 and 10-year dividend growth rates look decent, but what isn't obvious in these numbers is a dividend cut in 2010. In 2010, they cut the dividend "as a result of the decrease in net income of the Real Estate Business." (Source: 2010 Annual Information Form).

Granite Real Estate Investment Trust Financial Strength

Granite REIT has OK financial strength with BBB or equivalent credit ratings from DBRS and Moody's.

What is hurting their credit ratings is their reliance on one customer (Magna International Inc.) for such a high proportion of revenue. As of Q3 2018, 57% of revenue came from Magna International Inc. If they can get this to under 40% then they may have their credit ratings increased.

Source: November 30, 2018, Granite Investor Day Presentation

I like to see BBB+ or higher credit ratings, so this isn't a company I plan to invest in.

Using the dividend/distribution yield as a valuation tool suggests that it could be prudent to wait for a better starting dividend yield, say around 6-7%.

Granite Real Estate Investment Trust Final Thoughts

This most recent dividend increase was underwhelming at 2.6% and the credit ratings are one notch too low for me at BBB or equivalent, so it's not a stock I'm considering further right now.

6. Laurentian Bank of Canada - 1.6% Dividend Increase

Laurentian Bank is a Canadian bank primarily based in the province of Quebec. The bank was founded in 1846 and has been paying uninterrupted dividends since 1871.

They provide diversified financial services including a range of advice-based solutions and services to its customers through its businesses: Retail Services, Business Services, B2B Bank and Capital Markets.

Source: 2018 Annual Report

Laurentian Bank Dividends

Laurentian Bank of Canada which has a dividend streak of 11 years recently increased their quarterly dividend 1.6% from $0.6400 CAD to $0.6500 CAD. This dividend increase comes into effect with the dividend recorded on Jan 02, 2019.

The dividend yield as of January 9, 2019, was 6.0%, and they have 5 and 10-year average annual dividend growth rates of 5.1% and 6.9%, respectively.

While this recent dividend increase may appear low at only 1.6%, the bank has been increasing their dividend twice a year. If you factor in both increases, both were one cent increases, then the annual increase was 3.2% (Quarterly dividend of $0.63 to $0.65 over the year). Granted, still low, but better than nothing.

Laurentian Bank of Canada Dividend Policy

The Bank's target payout ratio is 40% to 50% of adjusted earnings per share. For fiscal 2018, they were at the mid to high end of that ratio at 45.9%.

Source: 2018 Annual Report

If they meet their adjusted EPS growth target of 5% to 10% then I'd expect dividend growth to start to improve, but it's a big IF currently. In 2018 they had some mortgage issues and were in the news for the wrong reasons; so if you are considering investing, you'll want to look into this further.

Laurentian Bank Financial Strength & Valuation

DBRS has given them an A (low) credit rating with a stable outlook which is OK, but S&P has given them a BBB rating with a negative outlook. S&P is below the BBB+ level I like to see.

If you are looking for Canadian banks with better credit ratings focus on the "Big 5" and you can get a much better credit rating and financial strength profile.

Using the dividend yield as a valuation tool suggests that they are undervalued as the yield is historically high for the bank.

Laurentian Bank Final Thoughts

I can understand why some investors might be tempted by Laurentian Bank's long history of paying dividends and its historically high dividend yield of around 6%, but the BBB credit rating from S&P makes the company a pass for me.

In 2018 they had some mortgage issues, so if you are considering investing, you'll want to look more into this too.

Dividend increases tend to send signals, and by keeping their recent dividend increases low it suggests that management is still a bit worried about the future. They've been increasing the dividend by one cent every other quarter going back to 2016. If they can break out of this trend with a higher dividend increase then I'd take this as a positive.

Summary

Monitoring dividend increases is a good idea because it can be a sign from management that they feel good about the future prospects of the company.

There were 6 December 2018 dividend increases in the Canadian Dividend All-Star List (An excel spreadsheet with a lot of stock information on all Canadian companies that have increased their dividend for 5 or more calendar years in a row.):

  1. Enbridge Inc. - 10.0% Dividend Increase
  2. National Bank - 4.8% Dividend Increase (2nd increase in 2018)
  3. Bank of Montreal - 4.2% Dividend Increase (2nd increase announced in 2018)
  4. Allied Properties Real Estate Investment Trust - 2.6% Dividend Increase
  5. Granite Real Estate Investment Trust - 2.6% Dividend Increase
  6. Laurentian Bank of Canada - 1.6% Dividend Increase (2nd increase announced in 2018)

Of these 6 companies, the one that I struggled with the most was Enbridge.

On the one hand, Enbridge is a wide moat stock, trading at what appears to be a cheap valuation, with a long dividend history, high dividend growth, and a high yield. On the other hand, the financial strength leaves a little to be desired, and the payout ratio is on the high side.

Let me know what you think of Enbridge.

Disclosure: I own shares of Enbridge Inc., National Bank, and Bank of Nova Scotia. You can see my portfolio here.

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.