DivGro Aug2008

DIVIDEND GROWTH STOCKS: John Heinzl's August 20 2008 Number Cruncher column in the Report on Business outlined 16 common (always common, never preferred) stocks which are not included in the TSX 60 but which had great (as in double digit)dividend growth in the 2003-2008 period. The stocks were listed in order of dividend growth. Six of ours were included, of course. Wisely, the column always says “A stock screen should be a starting point for more research.” If you are searching for this column, the title was: Outperforming growers outside the TSX 60

As valuation is all important - the return you get depends upon the price you pay - you have to check and see if any of these high dividend growth commons are value priced. My first test, and the quickest, would be P/E ratio: are any single digit? Actually, one is. Then we remember what Josh Peters, editor of Morningstar's Dividend Investor, says: “If we are buying stocks for income, sustainability [of the dividend] should be qualification number one.” The first stock in this list of John Heinzls was Reitman's (RET.A) with dividend growth of 48.4% over the period. If you believe that rate of dividend growth is sustainable, I have a bridge to sell you. Recall too, that on Friday August 22 2008, speaking about the economy on CNBC television, Warren Buffet said, “In my judgement, it won't be any better five months from now”. I'm not thinking of buying stocks now. Waiting is hard, but profitable: if you get your lower price, your returns will be much higher.

Here's another example. We bought 500 TransCanada in April of 1999 for $18.60 a share. Our yiled on the $1.44 annual dividend is now 7.7%. TransCanada reduced its dividend unexpectedly in early 2000. On March 17 2000, we bought 500 more TRP at $11.80 a share. Our yield now on that investment is 12.2% (1.44/11.80). That's the yield on our investment…just the yield. We are beating the market averages with just our dividend yield. As I write this in late August 2008, TRP's price is $40. We have quite a capital gain too. And the stock has held up quite well in the last year. Dividend growth investing is 'right some good' if you select the right common stock and pay a fair price, and have the patience to wait for the growing dividend to kick in.