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DSR
TOP 10
DIVIDEND GROWTH
STOCKS REPORT A list of 10 companies every dividend growth investor should consider
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Table of Contents
Legal Term of Use .................................................................................................. 4
Introduction ........................................................................................................... 5
3M Co (MMM) ....................................................................................................... 6
What Makes MMM a Good Business ................................................................. 6
Dividend Growth Perspective ............................................................................. 7
Stock Valuation .................................................................................................. 8
BlackRock (BLK) .................................................................................................... 10
What Makes BLK a Good Business ................................................................... 10
Dividend Growth Perspective ........................................................................... 11
Stock Valuation ................................................................................................ 12
Walt Disney (DIS) ................................................................................................. 13
What Makes DIS a Good Business .................................................................... 13
Dividend Growth Perspective ........................................................................... 15
Stock Valuation ................................................................................................ 15
Johnson & Johnson (JNJ) ...................................................................................... 17
What Makes JNJ a Good Business .................................................................... 17
Dividend Growth Perspective ........................................................................... 18
Stock Valuation ................................................................................................ 19
Lockheed Martin(LMT) ......................................................................................... 20
What Makes LMT a Good Business .................................................................. 20
Dividend Growth Perspective ........................................................................... 21
Stock Valuation ................................................................................................ 21
Canadian National Railway (CNR.TO) ................................................................... 23
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What Makes CNR.TO a Good Business ............................................................. 23
Dividend Growth Perspective ........................................................................... 24
Stock Valuation ................................................................................................ 24
Canadian Tires (CTC.A.TO) ................................................................................... 26
What Makes CTC.A.TO a Good Business .......................................................... 26
Dividend Growth Perspective ........................................................................... 27
Stock Valuation ................................................................................................ 27
Emera (EMA.TO) .................................................................................................. 29
What Makes EMA.TO a Good Business ............................................................ 29
Dividend Growth Perspective ........................................................................... 30
Stock Valuation ................................................................................................ 30
Royal Bank (RY.TO) .............................................................................................. 32
What Makes RY.TO a Good Business ................................................................ 32
Dividend Growth Perspective ........................................................................... 33
Stock Valuation ................................................................................................ 33
Telus (T.TO) .......................................................................................................... 35
What Makes T.TO a Good Business .................................................................. 35
Dividend Growth Perspective ........................................................................... 36
Stock Valuation ................................................................................................ 36
What’s Your Next Step ......................................................................................... 38
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Legal Term of Use
THE CONTENTS OF THIS MANUAL REFLECT THE AUTHOR’S VIEWS ACQUIRED
THROUGH HIS EXPERIENCE ON THE TOPIC UNDER DISCUSSION. THE AUTHOR
AND/OR PUBLISHER DISCLAIM ANY PERSONAL LOSS OR LIABILITY CAUSED BY THE
UTILIZATION OF ANY INFORMATION PRESENTED HEREIN. THE AUTHOR IS NOT
ENGAGED IN RENDERING ANY LEGAL OR PROFESSIONAL ADVICE. THE SERVICES OF
A PROFESSIONAL ARE RECOMMENDED IF LEGAL ADVICE OR ASSISTANCE IS
NEEDED.
WHILE THE SOURCES MENTIONED HEREIN ARE ASSUMED TO BE RELIABLE AT THE
TIME OF WRITING, THE AUTHOR, PUBLISHER AND THEIR AFFILIATES ARE NOT
RESPONSIBLE FOR THEIR ACTIVITIES. FROM TIME TO TIME, SOURCES MAY
TERMINATE OR MOVE AND PRICES MAY CHANGE WITHOUT NOTICE. SOURCES CAN
ONLY BE CONFIRMED RELIABLE AT THE TIME OF ORIGINAL PUBLICATION OF THIS
MANUAL.
THIS MANUAL IS A GUIDE ONLY AND, AS SUCH, SHOULD BE CONSIDERED SOLELY
FOR BASIC INFORMATION. EARNINGS OR PROFITS DERIVED FROM PARTICIPATING
IN THE FOLLOWING PROGRAM ARE ENTIRELY GENERATED BY THE AMBITION,
MOTIVATION, DESIRE AND ABILITIES OF THE INDIVIDUAL READER.
NO PART OF THIS MANUAL MAY BE ALTERED, COPIED, OR DISTRIBUTED WITHOUT
PRIOR WRITTEN PERMISSION OF THE AUTHOR OR PUBLISHER. ALL PRODUCT
NAMES, LOGOS, AND TRADEMARKS ARE PROPERTY OF THEIR RESPECTIVE OWNERS
WHO HAVE NOT NECESSARILY ENDORSED, SPONSORED, OR APPROVED THIS
PUBLICATION. TEXT AND IMAGES AVAILABLE OVER THE INTERNET AND USED IN
THIS MANUAL MAY BE SUBJECT TO INTELLECTUAL RIGHTS AND MAY NOT BE
COPIED FROM THIS MANUAL.
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Introduction
Hello!
My name is Mike McNeil and I’m the author of
The Dividend Guy Blog along with the owner and
portfolio manager over at Dividend Stocks Rock.
I earned my bachelor degree in finance-
marketing, own a CFP title along with an MBA in
financial services. Besides being a passionate
investor, I’m also happily married with three beautiful children. I started my online
venture to educate people about investing and to be able to spend more time with
my family.
I used to struggle with the same issues millions of small investors deal with on a
daily basis. Which stocks to buy? When to sell them? How to find the time to
manage my portfolio? How to diversify? I wasn’t into dividend investing until I
looked in depth at my portfolio returns and realized I was having difficulty keeping
up with the market.
The root of the problem was a very poorly built portfolio that lacked structure and
the components required to build a sturdy base. I made good money from the
stock market but I was taking unnecessary risk to achieve my investing goals.
From that point on, I was determined to create a portfolio strategy that would allow
me to benefit from dividend growth stocks as a solid foundation. Since then, I
manage my portfolio with a stress free method that enables me to cash out
dividend payments even when the market goes sour.
The purpose of this guide is to create a list of 10 very strong dividend growth stocks
that I can buy and sleep on. I didn’t want to make an exhaustive list as there are
several great companies to buy. I didn’t want to make a classic list either, this is
why I tried to avoid classics such as Coca-Cola (KO) in this list… but I couldn’t help
including Johnson & Johnson (JNJ) hahaha!
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3M Co (MMM)
What Makes MMM a Good Business
The strongest reason why you should add MMM to your portfolio is related to its
incredible ability to generate cash flow on a constant basis. Most 3M products are
consumable and generate repeat purchases. MMM makes sure to keep its
competitors behind it by spending over 2 billion in R&D annually while using
another 2 billion for acquisitions each year. However, 3M Co doesn’t forget about
its shareholders either. MMM has a strong history of dividend growth and stock
repurchases. The business evolves in 5 different segments:
Industrial Business (34%): This is the largest segment in terms of sales. The division
provides adhesives, abrasives, filtration systems, fasteners and specialty materials
to a variety of industries.
Safety and Graphics (18%): This business offers films, reflective materials,
projection systems, and the like. I bet you didn't know much about this part of 3M
Co, right?
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Electronics and Energy (17%): This is 3M’s biggest business operation in Asia with
two-thirds of its revenue coming from this region. Electronics and Energy provides
products for businesses including films for LCD screens and splicing products for
signal cables.
Healthcare (17%): The Healthcare business focuses on products offered to more
developed countries such as the US and Europe. It makes products in the areas of
wound care, oral care, drug delivery systems, etc.
Consumer and Office (14%): This is probably the division we know best as
consumers; 3M offers a variety of home office products in developed countries.
Over half of these segment revenues come from the US.
Dividend Growth Perspective
The company has posted a double digit annual dividend growth rate over the past
5 years (11.48%). Since earnings continue to increase even considering currency
headwinds, dividend investors should expect more dividend increases in the
upcoming years.
MMM was able to keep a payout ratio around 50% during the past 5 years leading
us to think that future dividend increase is sustainable even if the company faces a
global economic slowdown in the next couple of years.
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Stock Valuation
In my opinion, MMM should be part of most conservative (or core) dividend
portfolios. While you shouldn’t expect incredible growth from this company,
dividend payment increases will always be there each year. In order to verify if it’s
the right time to buy MMM, we will look at the company’s 10 year PE history along
with a Dividend Discount Model calculation.
As you can see, the strong dividend increase in the past 5 years hasn’t been ignored
by the market. The P/E ratio has continuously increased over the past 3 years. It
seems the company hasn’t been highly valued as right now. Let’s use the dividend
discount model to see how much the company is worth according to its dividend
payment ability.
Source: Dividend Toolkit
10% Discount $251.75 $166.76 $124.32
20% Discount $223.78 $148.23 $110.50
Intrinsic Value $279.72 $185.29 $138.13
$165.75
10% Premium $307.69 $203.82 $151.94
20% Premium $335.66 $222.34
Discount Rate (Horizontal)
Margin of Safety 8.00% 9.00% 10.00%
Calculated Intrinsic Value OUTPUT 15-Cell Matrix
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I’ve used a dividend growth rate of 8% for the first 10 years and reduced it to 6%
afterward. Then, I used a discount rate of 9% since the company shows stellar
numbers.
Considering MMM’s product portfolio and the fact the company is making the bulk
of its sales from consumable products in a business-to-business model, MMM
seems fairly attractive at the current price. This is a “long-term-dividend-growth”
stock for patient investors.
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BlackRock (BLK)
What Makes BLK a Good Business
It is THE asset manager in the U.S. with the largest market share (AUM) with its
iShares division. With over $1 trillion invested in its ETFs, BLK shows more than
double the AUM of the second-place State Street Corp. (NYSE:STT). Considering
investors' ever growing appetite for ETF investments; this is definitely an
interesting economic moat to develop.
But BLK is more than the largest ETF provider; it is also the largest investment-only
defined contribution plan provider. Their business covers all investments types
from fixed income to equities and as specific as alternative investment products. In
other words, as long as investors keep investing, no matter if they are looking for
equities or a safe place to protect their gain, BlackRock is the major player they will
be looking for.
Their third segment, retail, benefits from a very effective distribution system as
they essentially sell their ETFs and mutual funds. BLK focuses on product innovation
to make sure their retail business grows over time.
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The business now shows total assets under management of $5.1 trillion (December
2016), up 9.7% from last year. Even better, this is not only coming from the current
bullish market as AUM net increase for the last quarter only was standing at 105
billion.
Dividend Growth Perspective
BlackRock’s business model is the perfect definition of a cash generator: the more
money it manages, the more it generates. The best part is BLK makes fees on its
assets under management, regardless if they perform well or not. Even better: BLK
is the largest ETF manufacturer and this kind of product is not made to beat the
market but simply replicate it. In other words; the product can’t go wrong if well
built.
All three metrics (revenue, earnings and dividend growth) are aligned perfectly and
BLK will continue to raise its dividend for several years to come.
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Stock Valuation
Let’s take a look at the past 10 years’ PE ratio history to see how the stock market
values BLK:
As you can see, the company is now trading at a relatively stable PE ratio.
BLK shows an incredible dividend growth rate of 8.90% over the past 5 years. In
order to use the DDM, I used an 9% CAGR for the first 10 years and dropped it to
7% for the years after:
Source: Dividend Toolkit
Calculated Intrinsic Value OUTPUT 15-Cell Matrix
Discount Rate (Horizontal)
Margin of Safety 9.00% 10.00% 11.00%
$344.75
10% Premium $639.83 $423.87 $316.02
20% Premium $697.99 $462.40
Intrinsic Value $581.66 $385.33 $287.29
10% Discount $523.49 $346.80 $258.56
20% Discount $465.33 $308.27 $229.83
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Walt Disney (DIS)
What Makes DIS a Good Business
For a while, Disney’s revenue growth was saved by its media networks division
including the highly profitable ESPN. The company is currently facing more
headwinds in that sector as cable distributors are losing customers to internet &
streaming providers. Fortunately, the company has greatly improved its other
divisions over the past 5 years. The US economy rebound combined with a low price
for gasoline have improved the typical American budget for entertainment.
Disney also went from one success to another with its new Character movie film
Frozen. The new Star Wars trilogy is one of the main reasons why Disney posted a
record movie year in 2016. Not to mention the entertainment company is already
working on a sequel to blockbuster Frozen.
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Walt Disney is divided into five different segments:
Media Networks: ESPN is by far the most valuable asset in the division. While
ESPN’s operating income decreased slightly due to higher production costs and
lower advertising revenue, the Disney family compensated for the small shortfall.
Overall, this is a well-diversified segment split between kids and grown-up sports
fans.
Parks & Resorts: The Park division went through a very tough period when US parks
suffered from the previous recession while Euro Disney has been in a continuous
struggle for several years. While it's not getting any better in Europe, US parks'
profits soared by 20% in the last quarter, betting on a strong economy. The new
park in Shanghai should bring more to the table in the upcoming years.
Studio Entertainments: Disney's movie studios published a 33% surge in profits led
by three blockbusters: Frozen, Guardians of the Galaxy and Maleficent. They now
announced a sequel to their most recent success Frozen and the new Star Wars
Trilogy will make its on screen debut with its first movie in December.
Consumer Products: In my opinion, Disney's biggest strength lies in its business
model and the ability to integrate and cross-sell their ideas. Their most recent
success with Frozen is probably the best example. Disney hit the box office big time
with this movie and then went on to produce several derivative consumer
products. Strong with a licensing agreement with Hasbro (NASDAQ:HAS), Frozen
toys will sell for several years. Then, you can bet on new Frozen attractions to be
included in Disney Parks.
Interactive: The interactive segment is the virtual extension of Disney's products.
It creates and markets video games both online and for consoles. Many, if not all
of them, are derived from Disney characters and movies.
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Dividend Growth Perspective
Income seeking investors will tell me that the DIS dividend yield is not high enough
to be considered. However, you should not only look at its yield, but also at its
growth rate. In the past 5 years, the company has increased its payments by 19.70%
CAGR. In other words, the dividend payment doubled in 5 years.
The best part is the company’s payout ratio stands under 25% right now. I
personally can appreciate a low dividend yield if the payout ratio is at the same
level but the dividend growth perspective is through the roof.
Stock Valuation
Let’s take a look at the past 10 years’ PE ratio history to see how the stock market
values DIS:
While the company has been traded at lower levels in the past, the current growth
perspective explains the higher PE ratio. The recent drop in the stock price
represents a great entry point.
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The fact that Disney doesn’t pay a high yield doesn’t give a good perspective to
value the company with a dividend discount model. I used a discount rate of 11%
as it is a volatile business that goes with the economy. Then, I considered a 10%
dividend growth rate for the first 10 years and 9.5% after.
Source: Dividend Toolkit
As you can see, we are getting closer to a “real” value for the company. Overall,
Disney is probably the perfect combination of both strong dividend growth and
stock price growth at the same time.
10% Discount $307.09 $102.19 $61.21
20% Discount $272.97 $90.83 $54.41
Intrinsic Value $341.21 $113.54 $68.01
$81.62
10% Premium $375.33 $124.89 $74.81
20% Premium $409.45 $136.25
Discount Rate (Horizontal)
Margin of Safety 10.00% 11.00% 12.00%
Calculated Intrinsic Value OUTPUT 15-Cell Matrix
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Johnson & Johnson (JNJ)
What Makes JNJ a Good Business
Before we delve into the details, let's review some of the major JNJ milestones:
Dividend aristocrat with 54 consecutive years with a dividend increase;
31 consecutive years with adjusted earnings increases;
AAA credit rating
24 strong brands where 70% of them are #1 or #2 in sales in their market
We are talking here about a world class company. Their operations are divided into
3 segments: Consumer includes baby care, skin care, oral care, wound care,
women's health and over the counter pharmaceutical products. The consumer
segment did well last quarter showing 3.4% growth without the currency exchange
factor. The only sub-segment that was hit was the Wound/Care department as
Benecol's rights were sold to a UK interest.
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Pharmaceuticals include products for infection prevention, antipsychotics,
contraceptives, dermatology, gastrointestinal, hematology, immunology,
infectious diseases, neurology, oncology, pain management, thrombosis and
vaccines. The impact of slower sales expected for hepatitis C products due to more
competition was not enough to slow down the entire division. In fact, the
pharmaceutical sales show a strong growth of 10.2% or 3% once converted into US
dollars.
Medical Devices & Diagnostics includes all kinds of hospital equipment ranging
from diabetes care to spinal care. Unfortunately, stellar results from the pharma
are shadowed by disappointing results in Medical Devices with a sale decrease of
4.6% currency neutral. High competition and the sale of diagnostics products are
the reason of these results.
We rarely expect such important companies to show massive EPS growth as they
sell products everybody knows and has used for ages. These types of companies
are not in the habit of creating a boom. But JNJ has since 2012.
Dividend Growth Perspective
The company is a respected Dividend King that has never let its shareholders down
for the past 54 years. JNJ has always been reasonable with its dividend increases
and this is why the payout ratio is still under 50% today.
JNJ has maintained an annualized dividend growth rate around 7% for the past 5
years meaning it has the ability to double its payment every 10 years. The company
show a steady revenue and earnings uptrend that will ensure the dividend increase
sustainability for many years from now.
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Stock Valuation
Let’s take a look at the past 10 years’ PE ratio history to see how the stock market
values JNJ:
As you can see, the PE ratio is back to its 2008 submit. The valuation has been quite
hectic over the past 10 years showing PE as low as 11 and as high as 24.
I use a DDM with a 7.5% dividend growth rate (matching the past 5 years) for the
first 10 years and reduce it to 6% afterwards:
Source: Dividend Toolkit
Calculated Intrinsic Value OUTPUT 15-Cell Matrix
Discount Rate (Horizontal)
Margin of Safety 8.00% 9.00% 10.00%
$114.77
10% Premium $212.42 $140.92 $105.21
20% Premium $231.73 $153.73
Intrinsic Value $193.11 $128.11 $95.64
10% Discount $173.80 $115.30 $86.08
20% Discount $154.48 $102.49 $76.52
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Lockheed Martin(LMT)
What Makes LMT a Good Business
Lockheed Martin (LMT) is the world’s largest defense contractor earning 61% of its
sales from the US Department of Defense, 21% from other US government agencies
and 18% from international clients. Heavy regulation, years of symbiosis with the
US Defense department and their know-how are three key elements protecting
most of LMT’s business. Let’s just say you can’t start building military aircraft and
missiles in your basement to compete with this defense behemoth.
The company recently designed the most advanced fighter aircraft (F-35), made
important advances in light tactical vehicles and continues its work in space
exploration. These are costly industries where not many competitors can compete.
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Dividend Growth Perspective
While Lockheed Martin saw its revenue decline in 2014 and the spectre of
Government military budget cuts is always there year after year, the company
manages to become more profitable year after year.
The company continues to reward its shareholders with strong growth in dividend
payments. The past 5 years show an 18% annualized dividend growth. I don’t think
the company will keep this rate for long, but still, LMT is praised for increasing its
payments significantly.
The recent revenue boost comes from the recent integration of their most
impressive acquisition Sikorsky Aircraft helicopter division, making LMT the largest
military helicopter manufacturer in the world. If we ignore the recent spike, we can
see that revenue growth has been quite an issue for Lockheed Martin over the past
5 years.
Stock Valuation
Let’s take a look at the past 10 years’ PE ratio history to see how the stock market
values LMT:
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In order to have a better understanding of the company’s value, I used the dividend
discount model calculation spreadsheet with two stages. I used a 8% dividend
increase for the next 10 years and dropped it down to 7% afterward. I think the
company will continue to hike the dividend as high as it can until revenues come
back up. They have a strong cash flow machine in hand and can play this game for
a few more years. Since the business is relatively stable and the worst may have
already happened to LMT, I use a 10% discount rate.
Source: Dividend Toolkit
10% Discount $381.97 $253.83 $189.79
20% Discount $339.53 $225.62 $168.70
Intrinsic Value $424.41 $282.03 $210.88
$253.05
10% Premium $466.85 $310.23 $231.97
20% Premium $509.30 $338.43
Discount Rate (Horizontal)
Margin of Safety 9.00% 10.00% 11.00%
Calculated Intrinsic Value OUTPUT 15-Cell Matrix
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Canadian National Railway (CNR.TO)
What Makes CNR.TO a Good Business
I must admit CNR didn’t blink on my dashboard for a while because its dividend
yield is relatively low. At a 1.95% yield, we can’t talk about a “strong” dividend
payer. However, after digging further, I realize how strong the company’s
fundamentals are. They show incredibly strong metrics (please see chart below).
Canadian National Railway owns and operates the largest railway in Canada and
also operates in the USA. The company’s transportation activities are well
diversified among 7 different industries.
The management team makes sure to use a good part of this cash flow to maintain
and improve their railways (their biggest expense) while rewarding shareholders
with generous dividend payments. CNR has a very strong economic moat as
railways are virtually impossible to replicate. Therefore, you can count on
increasing cash flow coming in each year. Plus, there isn’t any better way to
transport most commodities than by train.
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Dividend Growth Perspective
CNR has been growing its dividend payments by 18.20% CAGR over the past 5 years.
For this reason, you should ignore its low dividend yield and focus on growth
perspective. The company payout ratio is around 30% while the railroad industry is
going through difficult times. Can you imagine how far CNR will go once railroad
transportation will go back on track?
Stock Valuation
Let’s take a look at the past 10 years’ PE ratio history to see how the stock market
values CNR:
CNR is currently trading higher than its average PE ratio. This is mainly because the
company’s industry is going through a challenging period. It seems there is a
premium paid for the luxury of buying such a strong company.
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The second model will give me a better idea of CNR's value as a dividend paying
machine. I’ll use a 2 level dividend discount model with a first dividend growth rate
of 8% for ten years and then 7% after. Since the situation is quite stable for
railroads, I will use a discount rate of 9%.
Source: Dividend Toolkit
10% Discount $172.69 $86.05 $57.18
20% Discount $153.50 $76.49 $50.83
Intrinsic Value $191.88 $95.61 $63.53
$76.24
10% Premium $211.07 $105.17 $69.89
20% Premium $230.26 $114.73
Discount Rate (Horizontal)
Margin of Safety 8.00% 9.00% 10.00%
Calculated Intrinsic Value OUTPUT 15-Cell Matrix
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Canadian Tires (CTC.A.TO)
What Makes CTC.A.TO a Good Business
Canadian Tire is a well-known and loved Canadian retail stores. It offers variety of
products throughout several categories (automotive, living, fixing, playing/sporting
goods, apparel and financial services). Besides the various Canadian Tire brand
declination, the company also owns Sports Experts, Sportchek and Atmosphere
brand under the FGL sports division (21.5% of CTC revenues).
Canadian Tire has built a loved brand that is part of every Canadian daily life. One
Canadian out of 5 owns a Canadian Tire credit card. Canadian Tire has also
successfully build an exclusive portfolio of products mainly in the automotive, living
and fixing categories. This competitive advantage ensures a constant flow of
customers in their stores everyday.
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Dividend Growth Perspective
CTC is another Canadian company with a relatively low yield (1.85%) but impressive
results (up +111% over the past 5 years and dividend growth of 91% during the
same period). With a very low payout ratio, Canadian Tire has enough room to stick
with a generous course with its shareholders. Due to its presence in the Canadian
economy, CTC enjoys a steady cash flow growing quarterly.
Stock Valuation
Let’s take a look at the past 10 years’ PE ratio history to see how the stock market
values CTC:
CTC trades at a 15 PE ratio and is poised for additional growth in the upcoming year.
If the Canadian economy would slow down, it would also serve as a solid shield
against any stock market drops. Canadian Tire will continue to benefit from its
leadership position in Canada and shows a strong combination of dividend growth
and stock appreciation perspectives.
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Using the DDM will tell us more about its real value. I used a 8% growth rate for the
first 10 years and reduced it to 7% afterward:
Source: Dividend Toolkit
Calculated Intrinsic Value OUTPUT 15-Cell Matrix
Discount Rate (Horizontal)
Margin of Safety 8.00% 9.00% 10.00%
$120.87
10% Premium $334.62 $166.73 $110.80
20% Premium $365.04 $181.89
Intrinsic Value $304.20 $151.58 $100.72
10% Discount $273.78 $136.42 $90.65
20% Discount $243.36 $121.26 $80.58
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Emera (EMA.TO)
What Makes EMA.TO a Good Business
Emera is an energy and service company. Emera’s main market is Nova Scotia as it
owns Nova Scotia Power, the province’s main electricity provider. Emera actually
owns power plants and distributes natural gas in Canada, the USA and the
Caribbean. It is actively developing more energy projects in Eastern Canada.
With two more projects starting in 2017 (Maritime link and an undersea power
cable) and the integration of its recent acquisition (TECO Energy) Emera will
continue its path to growth this year. Emera offers a great stability due to the
nature of its business. Its business model has been developed to generate
continuous cash flow.
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Dividend Growth Perspective
EMA is one of the very few companies offering a high yield (4.75%), interesting
dividend growth perspective (management committed to a 8% increase rate per
year throughout 2019) and relatively low risk (due to a solid business model). While
its payout ratio seems a bit high (83.63%), it is a better assumption to use the AFFO
(Adjusted Funds From Operation) payout ratio. This ratio stands at 59% which is
definitely sustainable.
Stock Valuation
Let’s take a look at the past 10 years’ PE ratio history to see how the stock market
values EMA:
An investment in EMA is an investment into a high dividend yield stocks with solid
perspective. The utility industry is slowing but surely growing each year and the
dividend payment will continue to be increased in the upcoming years. Since EMA
is continuously working on new projects, we can expect cash flow generation
capacity to increase and offer shareholders more reasons to smile.
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Using the DDM will tell us more about its real value. I used a 5% growth rate for the
first 10 years and reduced it to 6% afterward:
Source: Dividend Toolkit
Calculated Intrinsic Value OUTPUT 15-Cell Matrix
Discount Rate (Horizontal)
Margin of Safety 8.00% 9.00% 10.00%
$61.33
10% Premium $111.69 $74.72 $56.22
20% Premium $121.84 $81.51
Intrinsic Value $101.53 $67.92 $51.11
10% Discount $91.38 $61.13 $46.00
20% Discount $81.23 $54.34 $40.89
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Royal Bank (RY.TO)
What Makes RY.TO a Good Business
Royal Bank provides various financial services to individuals as well as commercial
and institutional clients. Their services range from regular banking, investments,
insurance, brokerage, mortgages, loans, etc. RY has successfully diversified its
revenues by increasing its expertise in capital market (more volatile, but showing
strong revenue growth perspective) and wealth management (notably through the
acquisition of City National late in 2015.).
Royal Bank is the largest bank in Canada per asset (a title that is often disputed with
TD Bank). It benefits from a great size and market share in Canada offering RY to
explore other avenues (such as U.S. acquisitions). They do an awesome job
generating strong profits from capital markets and their wealth management
division generates revenues from over 15 million clients.
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Dividend Growth Perspective
What we like about Canadian banks is that they are increasing their dividend
payout with a very steady and predictive manner. After a short pause following the
2008 crush, RY renewed with its bi-annually dividend growth tradition. Those are
small increases each time, but adds-up rapidly. We believe the company will be
able to sustain a 7-8% dividend increase over the next 10 years.
Stock Valuation
Let’s take a look at the past 10 years’ PE ratio history to see how the stock market
values RY:
While there are some clouds over the Canadian economy, I still believe investing in
banks is a good idea. In fact, even if we hit a housing bubble burst, RY will still
generate enough cash flow to keep a strong dividend growth profile. Revenues
generated from the capital market and the wealth management divisions will help
smothering any road bumps.
TOP 10 DIVIDEND GROWTH STOCKS
DIVIDEND STOCKS ROCK Page 34
Using the DDM will tell us more about its real value. I used a 5% growth rate for the
first 10 years and reduced it to 6% afterward:
Source: Dividend Toolkit
Calculated Intrinsic Value OUTPUT 15-Cell Matrix
Discount Rate (Horizontal)
Margin of Safety 8.00% 9.00% 10.00%
$97.42
10% Premium $177.42 $118.69 $89.31
20% Premium $193.55 $129.48
Intrinsic Value $161.29 $107.90 $81.19
10% Discount $145.16 $97.11 $73.07
20% Discount $129.03 $86.32 $64.95
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Telus (T.TO)
What Makes T.TO a Good Business
Telus offers residential phone, internet, TV and mobile phone services. Back in
2008, Telus also bought Emergis, a leading electronic healthcare solutions provider
and then created Telus health Solutions. Considering the number of wireless
subscribers, Telus is the 3rd largest provider in Canada..
The reason why Telus has been part of this selective list since 2012 is mainly
because it shows a perfect balance of stability, dividend increase and financial
performances. Strong from its mobile revenues, Telus is now eyeing television
services as a growth vector. Telus has built a solid brand through stellar client
service enabling the company to show the best customer satisfaction surveys.
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Dividend Growth Perspective
Telus has aggressively increased its dividend payout over the past 5 years going
from $0.29/share to $0.48/share. This had pushed the dividend payout ratio higher
(75%), but the company still has enough room to increase it for several years to
come. I now expect the dividend growth to slow down to high single digit (6-7%).
Stock Valuation
Let’s take a look at the past 10 years’ PE ratio history to see how the stock market
values T:
Telus is more a defensive play. While the DDM calculation shows Telus fairly
undervalued, I doubt the Canadian market will give it its full dividend value
potential. However, if you are patient, you will earn a 4.50% dividend yield and
eventually see the stock value going up.
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DIVIDEND STOCKS ROCK Page 37
Using the DDM will tell us more about its real value. I used a 7% growth rate for the
first 10 years and reduced it to 6.5% afterward:
Source: Dividend Toolkit
Calculated Intrinsic Value OUTPUT 15-Cell Matrix
Discount Rate (Horizontal)
Margin of Safety 9.00% 10.00% 11.00%
$56.71
10% Premium $93.86 $66.94 $51.98
20% Premium $102.40 $73.02
Intrinsic Value $85.33 $60.85 $47.26
10% Discount $76.80 $54.77 $42.53
20% Discount $68.26 $48.68 $37.81
TOP 10 DIVIDEND GROWTH STOCKS
DIVIDEND STOCKS ROCK Page 38
What’s Your Next Step
This list is only the beginning of a long journey toward dividend growth investing.
In the end, the true power of dividend investing is materialized through time. The
longer you keep your dividend growth stocks, the higher the return you will earn
from your investments. And this is how you will succeed in building a solid
retirement portfolio.
In order to help you out while building this portfolio, I’ve created a dividend growth
investing platform called Dividend Stocks Rock. This is an online membership site
that gives you access to all the tools and techniques you can personally use to build
a rock solid portfolio. This is not about stock recommendations or some kind of
guru principles. It’s about sound investing decisions made based on solid stock
research. And 95% of the work is done for you.
Dividend Stocks Rock will build your knowledge, skills, and investment capability
from the ground up. You’ll master the techniques you need to understand what
drives portfolio growth and individual stock growth to build the portfolio you want.
Most importantly, it will give you the data at your fingertips to allow you to put the
process into action from day 1.
TOP 10 DIVIDEND GROWTH STOCKS
DIVIDEND STOCKS ROCK Page 39
Dividend Stocks Rock is more than a premium investing newsletter:
We manage real-life dividend portfolios and send trade alerts when we
buy or sell a stock.
We provide you with pre-screened stock lists with various metrics.
We create 1 pager stock analyses to save you time from reading numerous
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We help you in your valuation process with an excel spreadsheet calculator
using a two stage dividend discount model.
We write a bi-monthly premium investing newsletter to keep you updated
on the stock market.
We have priced this product for the individual investor! Personally, I am sick and
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I sincerely hope this guide will help you build a stronger retirement portfolio and
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Good luck with your investments,
Mike McNeil - Founder of Dividend Stocks Rock
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