A stagnant dividend is often thought of as a poor dividend. As time goes by, things get more expensive and the value of a dollar consistently falls. That is why it is important to purchase companies that provide reliable, safe and growing dividends for your portfolio.
However it’s important to keep in mind the growth of the dividend isn’t the only thing we need to look for. If you’re looking to lock stocks into your RRSP that are going to generate passive income without you having to consistently monitor them, you need income stocks that have provided consistent growth over the long term. 2 or 3 years of consecutive dividend growth is a nice start, but when I look for set and forget stocks to purchase for my RRSP, I’m often looking at stocks that have provided dividend increases for a decade or more.
These two stocks have beat my benchmark and then some.
Fortis operates in a highly regulated industry, one that presents significant barriers to entry. This prevents newer companies coming in and taking away a portion of Fortis’s market share. The end result is steady cash flows, steady revenue and above all else, consistently rising dividends.
Fortis has raised dividends for four and half decades now. You heard that right, 45 years. It is one of the longest dividend streaks in the country, second only to Canadian Utilities (TSX:CU) which sits at 47 years. Although Fortis’s 5 year dividend growth rate sits at only 6%, it is its current streak of raising dividends that makes it one of the most popular stocks in Canada. Fortis has a payout ratio of nearly 70%, which is enough to scare most income investors. However, with its long standing history and the fact that the company is expected to achieve 3 and 5 year compound annual growth rates (CAGR) of 7.1% and 6.3% respectively, there are no fears of a stalling dividend in the future for Fortis.
Fortis yields 3.47% at the time of writing and its most recent dividend increase was nearly in line with its 5 year growth rate at 5%. The stock has returned 22.5% to investors over the last year, and has proven to be one of the best overall investments in the country. The stock is currently expensive, trading at over 20 times earnings and a PEG ratio of over 4, but we can come to expect somewhat of a premium attached to one of Canada’s best dividend stocks.
Imperial Oil (IMO.TO)
Imperial Oil (TSX:IMO) explores for, produces and sells crude oil and natural gas. The company has upstream, downstream and chemical operations that allow it to produce, refine and transport crude oil, natural gas and other petrochemical products.
Imperial has raised dividends for 24 straight years, and is one of the best dividend stocks in the country. Imperial’s payout ratio sits at only 29%, and the company’s dividend only accounts for 34% of its free cash flows, leaving plenty of room for more growth. It most recently raised its dividend by 18%, which is more than double its 5 year dividend growth rate of 8%. It currently only yields 2.10%, which may turn away some income investors, but those looking for strong dividend growth and an excellent entry price due to the oil and gas bear market should be looking at Imperial Oil right now.
Oil and gas is currently in the middle of a rough patch. In fact, we haven’t seen the industry this bad since the oil bear market earlier this decade. While most investors are staying away from the industry, those who have dug a little deeper can see these major oil and gas players are trading at deep discounts. Imperial trades at only 13.5 times forward earnings, and is priced at nearly book value with a price to book of 1.17. Analysts have placed a 1 year target price of $40.21 on the company, which signals just under 10% upside at today’s prices. Combine that with one of the fastest growing dividends in the country, and Imperial Oil may be a stock you want to stash in your RRSP and forget about until the industry inevitably recovers.