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Dividend growers easily outperform the market over the past 10 years

by Wayne Cheveldayoff, 2005-06-17

The strategy of investing in stocks with steadily growing dividends received a solid endorsement from a recent research report by UBS Securities Canada Inc.

The UBS report, authored by strategist George Vasic, examined dividend-paying stocks among the top 60 TSX stocks over the past decade.

The report identified nine (mostly) financial stocks with an impeccable record of dividend growth.

These nine have led the pack, posting annualized capital gains of 15.7 per cent versus 7.8 per cent for the TSX 60 overall.

This outstanding outperformance by the traditional dividend growers would have been calculated to be even higher if dividend payments had been included.

“It appears that it is difficult to go wrong over the long term with large-cap companies that have a solid track record of dividend growth, particularly in the financial sector,” the report stated.

The nine companies are the Bank of Montreal, Bank of Nova Scotia, CIBC, Enbridge, Manulife Financial, National Bank, Royal Bank, Sun Life Financial and TD Bank.

“They sport an above-market dividend yield (ranging from 2.1 to 3.6 per cent) and consistently strong rates of dividend growth,” the report said.

Indeed, with the exception of CIBC, which in one year (1999) did not raise its dividend, each of these companies has raised its dividend in every single year since 1995, with Manulife and Sun Life doing so since their demutualization.

However, the report notes that dividend growth is apt to slow, since part of the recent strength (notably among the banks) has been due to an increase in payout ratios – something that is unlikely to continue for long.

“Nevertheless, a 5 to 7 per cent rate of growth (in line with earnings) looks reasonable and, coupled with the 3 per cent yields, makes for a very attractive 8 to 10 per cent long-run return potential.”

The UBS report identified another outperforming group of eight consumer and industrial stocks with lower average yields (ranging from 1.0 to 3.9 per cent).

This group, which includes CNR, Dofasco, Imperial Oil, Quebecor World, Loblaw, Magna International, Thomson and George Weston, produced an average capital gain of 12.8 per cent a year since 1995 – well above the TSX 60’s annualized 7.8 per cent gain.

Though there has not been a dividend cut recorded among the eight, only five of the eight have increased their dividend every year (Dofasco, Quebecor World and Magna are the exceptions).

In contrast, a third grouping of dividend paying stocks with high yields (BCE, TransAlta and TransCanada, yields ranging from 4.0 to 5.0 per cent) had a spotty performance. Their long-run record of dividend performance is weak, payout ratios are very high, and two of the three (BCE and Transalta) have cut their dividend at least once in the 10-year period.

The UBS report also concluded that dividend growers have not necessarily lagged the rest of the market when bond yields rise, which contradicts orthodox opinion on this matter.

And neither do the dividend growers necessarily lag when the market overall rallies. For instance, the financials actually outpaced the market rally since September 2002, with the high-yield growth trailing far behind and the consumer/financials group also lagging.

The UBS report is one of a number in recent years that have examined the importance of dividends in investment performance.

Others have found, for example, that the compounded return from reinvested dividends accounted for more than 60 per cent of the total return from the Toronto Stock Exchange Index over the past 48 years.

An Ibbotson Associates report found that the real total return on U.S. stocks since 1926 has been 7 per cent or so, and dividends accounted for 4 percentage points of that total.

However, as the UBS report makes clear, not all dividend-paying stocks outpace the market.

Careful selection would be the key for any individual investor putting together a winning portfolio.

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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©2005 Wayne Cheveldayoff