Wednesday, August 6, 2008

The Future of Canadian Dividend Growth I

In the quest to select solid dividend paying stocks that will appreciate over time and pay ever-increasing cash back to us in the form of dividends, success lies in the future, not the past. Sometimes the best dividend growing stocks for the future might be only in their infancy as far as dividend growth goes. As investors, if we can spot these stocks early we can be rewarded in spades as the years go by.

A few Canadian companies strike me as fitting into this category very well. Shoppers Drug Mart (SC) is a very well run retail drugstore chain with over 1,000 locations across Canada. Shoppers is in the sweet spot of demographic and transportation-cost trends. They have paid a dividend since March of 2005 only. Since they paid their first dividend Shoppers has raised their the cash payout by an astonishing compound annual growth rate of 30%. The stock currently yields about 1.6%, and the dividend pay out ratio as a percentage of earnings per share is only 28%.

In summary I believe the future is bright for Shoppers Drug Mart. Their dividend growth should continue as long as earnings push forward, which I believe they will. Even if the dividend growth and earnings growth rates slow significantly, most investors would be very happy with growth rates half of what Shoppers has produced from 2005 to date. The caveat to Shoppers as an investment right now though is that the stock is not cheap. Trading at 22x earnings, any earnings miss or slowdown in growth could send this stock spiralling. That being said, I feel that any major weakness in this stock would be a huge buying opportunity, which is why I remain on the sidelines ready for such an event.

This article was written by the moneygardener. You may email questions or comments to me at [themoneygardener(at)].


  1. One of the cornerstones of my dividend growth portfolio.

    I would agree with the risk that an earnings miss would bring to the stock, but even lower growth in future years would still put this company well ahead of many competitors or companies operating in the retail segment. They also benefit from a great demographic niche in comparison to some of the larger discount operators.

    This is a stock you buy on dips and have to adjust your valuation model in order to get a reasonable FMV. Own a good company at a cheap price OR own a great company at a reasonable price?

    That's the question many value investors face and while you don't want all your stocks to be #2 there is certainly room witin a diversified portfolio for a balance of both.

  2. One of the major weaknesses in my dividend portfolio is that I exclude stocks which currently yield less than 2% regardless of dividend growth rates and dividend payout ratios.
    That being said it would take me 12years before I earn a 4% yield on cost on a stock yielding 1% and growing the dividend by 12%/year.
    On the other hand however such a stock will most probably still yield 1%-2% on year 12.. Which means that there will be huge capital gains. It's very tough to project past performance into the future however.

    That's why I stick with growers yeilding at least a market average yield and have a longer history of growing their dividends. I like to have some predictability.

  3. DGI,

    That's a valid point, but for an investor such as myself just beginning their portfolio and accumulating shares those stocks yield <2% offer some amazing opportunities. I'll reference SAP as an example. I bought the stock with a yield <2% and the it continues to yield <2%, but has grown its dividend over 40% since my purchase and my CG stands at nearly 30%.

    I don't advocate an investor having a portfolio full of similar stocks such as SAP or SC, but they certainly add an element to the dividend growth ability of a group of stocks over the long-term

  4. Nurse 911,

    I totally understand your way of thinking. That's why it's good to have both types of stocks -
    1. high current yield, low dividend growth

    2. lower current yield, higher dividend growth,

    3. something in the middle in terms of growth and yield

    4. Always try to find new dividend growth stocks that fit your criteria.

    Remember that high yields could be cut and become low yields. Or low yielding securities could stop growing their dividends.
    A dividend cut might not be a reason to sell your dividend stocks, because it might mark a bottom in the stock's price.

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  7. DGI, take a look at MRU.a;tsx (Metro).

    They started by paying a 0.03$/share dividend and now pay $0.50 / share. Thats 1,500% growth since the mid-90s. The stock went from about $4 / share to $25 / share in the same time (525% appreciation). The yield started at 1% and is barely 2% these days but the growth speaks for itself even though it is a low yield. The stock came out with earnings today and they were pretty decent, better than what most people were probably expecting. They announced that their payout ratio is only about 20% so there is still plenty of room for further annual dividend increases too!


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