Canadians love dividends, it is not only the culture but also an implied encouragement in the tax system which treats dividend income favourably with the dividend tax credit. As a result, dividends are the most common form of capital returns to shareholders in Canadian public equities compared to the US which tends to prefer share buybacks. Because, unlike share buybacks (which ultimately should lead to capital gains) which could be subject to market volatility, the dividend received is “real money” at the end of the day, which could be either spent or reinvested. Numerous companies use their track record of consistent and growing dividend payments for decades as a badge of honour, and companies such as Royal Bank of Canada (RY) or Enbridge (ENB) are rewarded handsomely by the market with higher valuation multiples relative to US peers.

Very few businesses are stable and strong enough to withstand the pressure of competition because capitalism tends to attract fierce competition, especially in industries with above-average, attractive returns. Companies with consistent and growing dividends year after year even during economic downturns could possess some underlying competitive advantages that are difficult for competitors to copy, and therefore, are attractive candidates for long-term investment. This consistency demonstrates not only the resiliency in the business model or staying power but also the fact that the company possesses pricing power that helps it raise prices without losing market share over the years.

Buying and holding “dividend-growth” machines could be one of the safest ways to build generational wealth, it is the investors’ dream that the annual dividend received will eventually equal the cost basis. Here we have filtered out a small subset of high-quality companies that grew their dividend per share over the last ten years supported by a healthy growth in fundamentals.

Below we have screened for companies with the following criteria:

• 10-year compounded annual growth rate (CAGR) in dividend per share of at least 10%
• Market cap larger than $100 million
• Earnings before interest and tax (EBIT) CAGR of at least 10% in the last five years

Here is the screener:

The criteria above reflect companies that grew their dividend per share at least with a 10% compounded annual growth rate (CAGR) in the last 10 years, which is a really high bar to achieve over a decade. Secondly, we like to see the dividend growth largely supported by a growth in the fundamentals rather than by taking on more leverage to achieve this. Therefore, we screen for companies with at least 10% CAGR on EBIT in the last 10 years. As usual, we prefer companies that are over $100 million in market cap, as these companies have proven themselves to be more mature, self-sustainable entities.

Each criterion here is a high bar to achieve consistently. In addition, a combination of them including the 10-year EBIT growth (at least 10%), and 10-year dividend CAGR (at least 10%) results in 21 names within the Canadian equities universe. It is important to note that although dividend growth is a positive sign, investors need to ensure the growth in dividend payment going forward is supported by growing fundamentals of the business, not from financial engineering tactics such as leveraging up the balance sheet or issuing shares to pay for the dividends.

Members will recognize some of the names that we cover in our Model Portfolios and coverage list such as TFI International Inc. (TFII), Toromont Industries (TIH) and Alimentation Couche-Tard (ATD).

Lastly, these companies on the list are not recommendations, but rather a starting point that helps investors generate potential investment ideas.

Unlock the Power of Informed Investing with 5i Research!

DIY investing doesn't have to mean going it alone. At 5i Research, we're your trusted partner in navigating the stock market. Our platform offers comprehensive stock and market research, empowering you to make smart investment decisions. 

• Investor Q&A: Have burning questions? Get answers from our team of experts and fellow investors in our dedicated Q&A section.
• Research Reports: With over 60 meticulously researched Canadian stocks, our reports offer in-depth analysis, giving you the confidence to invest wisely. 
• Model Portfolios, Alerts, Forums, Portfolio Tracking, and Much More...

Take Care,

Disclosure: The analyst(s) responsible for this report do not have a financial or other interest in the securities mentioned.