4 Canadian Dividend Growth Stocks to Own in a TFSA
These Canadian dividend growth stocks are the largest companies traded on the TSX that have all achieved annualized dividend growth of at least 15% over the last five years. These companies have also met criteria of growing revenue and earnings over the same time period.
Dividend growth stocks can be extremely powerful for long term investors. Dividend growth will allow investors to get an extremely high dividend yield on the price they paid on purchase. This is a formula known as yield on cost.
Yield on cost = Current dividend per share / price of share on purchase
The key here is that the yield may be constant as the share price appreciates, but the investor gets the benefit of all of the dividend increases along the way. If a 3% yielder doubles the dividend per share, the yield on cost will be 6%.
This can be extremely powerful for great companies that end up growing their dividend for a long time and become what is known as dividend aristocrats.
Here is the list.
1) CN Rail
CN Rail is one of the largest railroads in North America and has had an impressive growth story. At a massive $87 Billion in market cap, CN Rail yields 1.78% which might seem like nothing special.
However, CN Rail has posted by over 16% annual dividend increases over the last five years.
2) Magna International
Magna is the largest auto parts manufacturer in North America and the second largest worldwide. Magna International has shown consistent growth on the top and bottom lines of their income statement.
They are especially good at lowering costs, aggressively buying back stock and raising the dividend for shareholders. Magna has increased earnings by 17% a year and hiked the dividend by over 15% a year over the last five.
Magna has consistent hiked the dividend and is showing no signs of slowing down. At a 2.7% yield and trading at only 7.5 times earnings, the stock has strong fundamentals of growth, income and value.
3) Open Text Corporation
Open Text has been a very impressive growth story that originated in Canada. They are an enterprise management software company that has grown organically and by acquisition.
Open Text has been able to land very profitable software contracts that ensure very stable recurring sales. Through this growth, OTEX has been able to sustain impressive numbers on their top and bottom lines. With healthy cash flows, the dividend has seen over 16% growth year over year.
At a current 1.55% dividend yield and a PE of close to 40, the stock is not necessarily cheap. However, their ability to generate strong free cash flow demands high multiples.
When compared to other technology stocks on the TSX, Open Text is a great company for investors seeking dividend income growth.
4) Gildan Activewear
Gildan Activewear sells fashion and athletic clothing focusing on basics. I first noticed Gildan’s strength in the industry when every local beer-league softball team has their team’s shirts made by Gildan.
At $10 Billion in market cap, Gildan has posted some sustained growth to the top and bottom line. The 1.44% dividend yield won’t make you look twice, but the almost 20% annual growth in dividend might.
Investors with a long-term mindset should look for companies with a commitment to rewarding shareholders through consistent dividend raises. Historically, the Dividend Aristocrats Index, which is a group of companies with a long history of annual dividend increases have outperformed the broader index.
Investors sometimes chase current dividend yield. However dividend growth should not be overlooked as these companies have the potential to deliver very strong long-term performance.