In this edition of ‘Stock Teasers’ we are going to be looking at a submission to /r/CanadianInvestor on Reddit, the user is asking if you had to own one Canadian dividend compounder for the next ten years, what would it be? Let’s dive in!

Buying and holding high-quality dividend-growth companies could be one of the safest ways to build generational wealth, Canadian investors love dividends, and it is the dream of most investors that the annual dividend received is equal to the cost basis and investors can pass through their holdings to the next generation. Although picking and owning these few “compounders” through business cycles is not easy, we argue that owning just one of these could make a lifetime of individual stock picking worthwhile.

The top ten names with the highest dividend growth rate in the last ten years

In order to seek those life-changing stocks, we think investors need to look back before looking forward. Here is the top ten Canadian stocks with the best 10-year track record of dividend growth.

ELF           E-L Financial Corporation Limited    41%

QBRA       Quebecor Inc.                                   37%

GSY          goeasy Ltd.                                       27%

QSR         Restaurant Brands International Inc 25%

PRVUN     Pro Real Estate Investment Trust     23%

ATD           Alimentation Couche-Tard Inc.         23%

GCGA       Guardian Capital Group Limited       21%

CNQ       Canadian Natural Resources Limited 20%

CCLB        CCL Industries Inc.                           20%

WFG         West Fraser Timber Co. Ltd.            19%

Ten years is a long time, and it is a respectable record to study. Although the historical track record does not mean these companies would continue to do so in the foreseeable future, it could be a starting point for investors to look for ideas. The list above already includes some of the high-conviction names in our model portfolio, including goeasy Ltd. (GSY) ; Alimentation Couche-Tard Inc. (ATD); Canadian Natural Resources Limited (CNQ), and CCL Industries Inc. (CCL.B). We think the probabilities are high that these names will continue to do well for long-term investors five or ten years from now. Here we have a few pieces of advice that we think could help investors avoid mistakes in the effort to seek these compounders:

1.   Do not just own ONE name: The question of “if you had to own one” is an interesting mental exercise that investors can practice, the idea is to evaluate all the opportunities by taking into account opportunity costs and picking out the best of them. That being said, investors should not own just ONE thing, it is way too risky for most investors to bet heavily on one horse.

2.   Dividend growth rate or dividend yield?

Investors are easily attracted to the high dividend yield. Sometimes, investors make investing decisions based on that fact alone. It is understandable, however, that sometimes the dividend yield is just the tip of the iceberg, and investors need to dig deeper to understand whether the dividend yield is sustainable. The rule of thumb is to own a name with a high dividend growth rate supported by growing fundamentals, not just a high yield alone.

3.   Focus on the micro, not the macro: It is a common mistake for investors to position the portfolio based on certain macro expectations such as inflation, election, interest rates, etc. These things are highly unpredictable and short-term in nature. It is rare to find investors who are consistently right on macro factors. We think it is better to concentrate resources on something investors do know and can control, which is companies’ fundamentals.

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Authors, directors, partners and/or officers of 5i Research do not hold a financial or other interest in the above companies at the time of publishing. The i2i Fund does not hold financial or other interest in the above companies or ETFs at the time of publishing