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)gmail.com].

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