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Buying stocks with growing dividends is a winning retirement investment strategy

by Wayne Cheveldayoff, 2004-11-25

Dividend-growth investing is a simple strategy: If you buy stocks with growing dividends, in a decade or two the dividends will exceed anything you can hope for from bonds or income trusts.

But implementing such a retirement investment strategy is not that easy, especially if you try to do it all yourself.

It takes substantial research time to figure out which stocks have had solid dividend growth in the past and which have the best prospects for long-term dividend growth in the future.

Some full-service investment dealers may publish research along these lines for their clients. But there isn’t a website offering such information for free. (The Globe and Mail recently published a list of stocks with rapid dividend growth over one, three and five-year time frames, but the list was specially compiled from a database the Globe sells to subscribers and it doesn’t offer a facility to screen for dividend growth at its Globeinvestor website.)

A strong advocate of dividend-growth investing is Thomas Connolly, a Kingston, Ontario investor who since 1981 has published a newsletter, The Connolly Report, devoted to picking the best stocks for this strategy and who maintains an interesting commentary on the dos and don’ts of dividend-growth investing at his website at

“My retirement plan is very simple,” Mr. Connolly says on his website, last updated in October 2004.

“When they are value priced, I buy common stocks of companies which have a good record of increasing dividend payments and hold them for the rising income.

“Here’s an example: We bought our BC Gas (now Terasen) in April of 1995 for $6.85 (a share). The dividend has grown from $0.45 to $0.84 a share. Our yield on those shares is now 12.3 per cent (0.84/6.85). The price of Terasen has just quadrupled too. Since the collapse of the stock market in the spring of 2000 alone, Terasen is up over 90 per cent.”

Mr. Connolly says he doesn’t buy bonds or GICs. “Have you ever known a bond to increase its interest rate?” Fixed income investors have been hurt in recent years as interest rates have fallen.

“Here’s one more example I just computed as the Bank of Montreal announced a second dividend increase for 2004….Our BMO dividend goes up to $0.44 (a share) in November 2004 ($1.86 a year). In February 2004, our (dividend) payment was $0.35. That is a 25 per cent increase in one year. The yield on our $5.78 price in 1985 is now 30 per cent (1.76/5.78). The price of BMO has more than quadrupled too. We paid $9.250 for 400 shares in 1985….We now have (with stock splits) 1,600 shares valued at $86,400. We are not selling: We are holding for the 30 per cent yield and future dividend increases.”

How does one get started with such a strategy? Which are the best stocks for it?

Mr. Connolly says the best are stocks with recent dividend growth – not necessarily those with the highest dividends – and investors should stick to high-quality companies.

“Your basic portfolio will start with a telco (BCE, Aliant, Telus or Manitoba Telecom), a pipeline (TransCanada Corp. or Enbridge), an electrical utility (Canadian Utilities, Fortis, Emera, or TransAlta), Terasen (formerly BC Gas) and one of the major banks.

“These stocks are not very volatile…they vary in price by only a few dollars a year. Also, these stocks produce good cash flow from a needed product. They will still be in business years from now.

“My general rule for stock selection is this: buy the one with the highest yield and a recent dividend increase…say an increase in the last year. To give you a bit of guidance from over 20 years of selecting stocks for my own portfolio (as I am revising this paragraph in October 2004) that common stock would be TransCanada. I eliminated TransAlta, Laurentian Bank, Aliant and BCE, all of which have higher yields than TransCanada, because there was no recent dividend increase for these four.”

As with all investment strategies, nothing is guaranteed. If you are thinking of following this approach, you may want to supplement your own research with stock-pick ideas from a seasoned full-service investment advisor.

Wayne Cheveldayoff is a former investment advisor and professional financial planner. He is currently specializing in financial communications and investor relations at Wertheim + Co. in Toronto. His columns are archived at and he can be contacted at

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©2004 Wayne Cheveldayoff