In a volatile macro-economic environment, dividends provide a semblance of certainty. Dividend growth stocks provide investors with an opportunity to benefit from a steady stream of passive income. Further, quality dividend stocks will also increase investor wealth via long-term capital gains.  

Companies that pay dividends need to have strong fundamentals and should generate stable cash flows across business cycles. They need to have a sustainable payout ratio as well as low leverage ratios. But the best dividend companies are those that can increase these payouts consistently over time.

Here, we look at four such Canadian dividend growth stocks trading on the TSX that have increased dividends for the last five years.

Enbridge

Canada’s energy giant Enbridge is one of the best dividend-paying companies on the TSX today. With a forward yield of a tasty 7%, ENB stock has increased dividends for 26 consecutive years. In the last five years, it has increased dividends at an annual rate of 11.7%.

Enbridge is a well-diversified company with a robust business model. A majority of its cash flows are backed by long-term contracts making it almost immune to fluctuations in commodity prices.

When several energy companies reduced or suspended their dividends due to falling crude oil prices, Enbridge managed to hold it’s own showcasing its resilient business. Enbridge is a midstream company and is now investing heavily in the renewables energy space thereby expanding its base of cash-generating assets.

Enbridge aims to increase its distributable cash flows between 5% and 7% through 2023 which suggests dividend increases are on the cards in the future as well. It aims to pay between 60% and 70% of its DCF which is reasonable compared to its peers.

Fortis

One of Canada’s dividend giants, Fortis is a company that has increased dividends for 47 consecutive years. In the last five years, Fortis has increased dividends at an annual rate of 6.8%. Fortis is a utility giant and is part of a recession-proof industry.

Incorporated in 1987 with $390 million in assets, Fortis ended 2020 with $56 billion in assets. The company serves three million customers in Canada, the U.S., and the Caribbean. Fortis stock has a forward yield of 3.6% and aims to increase payouts by 6% annually through 2025.

Fortis confirmed it will continue to expand and diversify through investment opportunities in renewable power and infrastructure verticals while looking out for strategic acquisitions.

In the first quarter of 2021, Fortis increased its net earnings to $0.77 per share, up from $0.68 in the prior year period. Its bottom-line growth was driven by an increased rate base and higher earnings in Arizona. The utility heavyweight invested $900 million in capital expenditure in Q1 and confirmed it remains on track to deploy $3.8 billion in CAPEX this year.

Fortis also aims to increase its mid-year rate base from $30.5 billion in 2020 to $40.3 billion in 2025 which should allow it to support future cash flow growth and dividend increases.

Algonquin Power and Utilities

One of the best dividend growth stocks on the TSX is Algonquin Power & Utilities. Valued at a market cap of $11.6 billion, AQN stock has a forward yield of 4.4%. However, the company has grown its dividends at an annual rate of 7.5% in the last year. AQN stock has also generated cumulative returns of 434% since it went public back in 2009.

In the first quarter of 2021, Algonquin’s adjusted EBITDA rose by 17% year over year to $283 million while earnings per share were up 5% at $0.20. This allowed the company to announce a 10% increase in its dividends which will be payable on July 15.

Algonquin’s regulated services business reported an operating profit of $204.8 million in Q1, compared to its year-ago figure of $170.2 million. Its renewable energy business saw its EBITDA increase from $88.4 million to $96.3 million in this period.

Emera

Emera is an energy and services company and is engaged in the generation, transmission, and distribution of electricity to various customers. At the end of 2020, Emera’s electric utilities served 792,500 customers in West Central Florida, 529,000 customers in Nova Scotia, 131,000 customers in Barbados, 19,000 customers in the Grand Bahama Island, and 34,000 customers in the island of Dominica.

Further, its gas utilities and infrastructure business serve 426,000 customers in Florida and 540,000 customers in New Mexico.

Emera pays an annual dividend of $2.55 per share indicating a forward yield of 4.5%. In the last five years, Emera has increased dividends at an annual rate of 8.3%.

Its quarterly adjusted earnings increased by $0.17 per share to $0.96 in Q1 driven by continued strength in its regulated portfolio as well as lower financing costs. The company is also on track to deploy over $2 billion in CAPEX this year to increase rate base growth and advance the company’s strategy.

During the earnings call, Emera’s CEO and President, Scott Balfour stated, “Emera’s proven strategy of safely delivering cleaner, affordable and reliable energy has been a driver of growth and innovation for over 15 years.

As customers and policymakers look to accelerate the pace of decarbonization, Emera is aligned and well positioned to help lead the energy transition in a way that never loses sight of affordability and reliability for customers while continuing to deliver long-term value to shareholders.”

The final takeaway

We have seen that companies that are increasing their dividends are able to do so by reinvesting in capital expenditure and expanding their base of cash-generating assets.

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