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Good time to buy dividend growers, says stock strategist

by Wayne Cheveldayoff, 2006-08-24

A buying opportunity may have emerged for dividend-paying stocks, says UBS Securities Canada Inc. strategist George Vasic.

Rising bond yields have recently restrained their performance but even with this dampening effect, stocks with rising dividends have easily outperformed the market over the past 10 years and have a much better reward-to-risk ratio than the market as a whole, he says.

Mr. Vasic in an early August report focused on the companies among the 60 largest TSX stocks that consistently grow their dividends.

“Big-cap dividend growers have continued to be an excellent long-run investment; they kept up with the resource-led TSX rally of the last four years, clearly outperformed during the tech bust (as would be expected), and overall kept up with the tech-led market when viewed from 1995 to 2000 (though not with the most frenzied 24 months from 1998 to 2000).

“Specifically, we identified nine (mostly financial) stocks with an impeccable record of dividend growth, as well as another six consumer/industrial stocks with lower yield but solid long-term dividend growth.

“We find that the mostly financial stocks have led the pack, posting annualized gains of 17.8 per cent versus 10 per cent for the TSX 60 since 1995, even before allowing for their higher yield.”

This group includes Bank of Montreal, Bank of Nova Scotia, CIBC, Enbridge, Manulife Financial, National Bank of Canada, Royal Bank, Sun Life Financial and Toronto-Dominion Bank.

Mr. Vasic also found that the 13.4-per-cent average annual rise in the stocks of a group of consumer/industrial dividend growers also significantly outpaced the TSX 60. The consumer/industrial group includes CNR, Imperial Oil, Loblaw, Magna International, Thomson and George Weston.

A group of three higher-yielding stocks, including BCE, Transalta and TransCanada Pipeline, produced average annual gains of 9.8 per cent from 1995 to the present, basically even with the TSX 60.

Mr. Vasic points out that the relatively good performance of the three groups came with volatilities that were comparable to the market, meaning that a higher risk of fluctuations wasn’t associated with the higher return produced by the dividend growers.

Furthermore, in the recent period of rising bond yields, the dividend-growers simply experienced a dampening of their growth trajectory rather than actual share-price declines as some investors feared.

Overall, according to the UBS report, dividend growers don’t always decline when bond yields rise (although they have in some periods in the past), they do reasonably well during lackluster markets and they do very well when the market rallies.

“The bottom line has been long-run outperformance with similar levels of volatility – thus a much better reward-to-risk ratio than the market as a whole.”

In the near future, for the top-performing mostly financial group, “dividend growth is apt to slow, since part of the recent strength (notably among the banks) has been to raise payout ratios. Nevertheless, a 5-to-7-per-cent dividend growth rate (in line with earnings) looks reasonable, and coupled with the (approximate) 3-per-cent yields, makes for a very attractive 8-to-10-per-cent long-run return potential.”

In this group, average annual dividend growth rates in the period 2000 to 2006 have ranged from 10.4 per cent for Enbridge to 23.5 per cent for Manulife Financial, with Bank of Montreal recording 14.8 per cent, Bank of Nova Scotia 20.5 per cent, CIBC 13.7 per cent, National Bank of Canada 17.6 per cent, Royal Bank of Canada 16.7 per cent, Sun Life Financial 14.8 per cent and Toronto-Dominion Bank 11.4 per cent. Dividend yields in this group range from 1.9 per cent to 3.6 per cent.

In the consumer/industrial group, CNR recorded an average annual dividend growth rate for the same period of 18.6 per cent, Imperial Oil 3.5 per cent, Loblaw 15.7 per cent, Magna International 3.5 per cent, Thomson 4.1 per cent and George Weston 12.8 per cent. Dividend yields in this group range from 0.8 per cent to 2.2 per cent.

In the higher-yielding group, BCE’s dividend grew by an average annual rate of only 1 per cent from 2000 to 2006, TransCanada 8.1 per cent and Transalta showed no growth at all. BCE has a dividend yield of 5.5 per cent, TransCanada 3.7 per cent and Transalta 4.2 per cent.

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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©2006 Wayne Cheveldayoff