This is a gust post from The Dividend Beginner.
Hello Sure Dividend readers, I am The Dividend Beginner, a 22-year old Canadian dividend growth investor from Montreal.
I started following other DGI sites after I made my first stock purchase in the Vanguard US Total Stock Market Index ETF (TSE: VUN).
Once I realized the benefits of dividend growth investing from an assortment of blogs, Sure Dividend being one of my favorites, I decided I too would become a dividend growth investor, with a focus on Canadian stocks.
I sold my shares in VUN shortly after and began my DGI journey. In one year I’ve built up a passive income stream consisting of an average dividend income of $150 per month.
I plan to be financially independent in my 30’s, though I don’t have it all planned out in full detail now. By day I’m a full-time software developer, and in my free time I enjoy reading about finance, the economy, and stocks, investing in dividend growth stocks, and developing apps and websites.
You can also engage with me @dividendbegin on twitter.
I agree with the notion you shouldn’t purchase stocks based on the frequency of dividend payments. One should not purchase stocks solely because they pay dividends every month rather than every quarter, or half-year. With that said, in this post we’ll take a look at some stocks which pay high-yielding monthly dividends, and have stellar valuations, growth, dividend growth, and business models.
Considering I’m a Canadian investor, we’ll take a look at some great stocks which trade on the TSX. The majority of the audience is most likely U.S. investors, realize that you can snag up these stocks at an even greater discount considering the USD to CAD exchange rate. In that way, these yields are effectively even larger for a U.S. investor.
Exchange Income Corporation
Exchange Income Corporation (EIF.TO) is an absolute killer stock trading at a beautiful valuation. Exchange Income Corp. is a diversified, acquisition-oriented corporation which focuses on aviation services and equipment, and manufacturing. It’s really very rare to find a high-yielding, dependable dividend growth stock in the industrial sector trading on the TSX.
EIF.TO is up 38% in the past 52 weeks, and now yields 5.97%, though last week it yielded nearly 7.00% since the share price has skyrocketed up 10% in the past 5 days.
Exchange Income Corp. has a very narrowly defined acquisition strategy to purchase companies which are or can be income generating vehicles so that the income can be paid out to shareholders in the form of dividends and also reinvested to acquire even more companies – rinse and repeat.
For example, in 2015, EIF.TO acquired Provincial Aerospace and Ben Machine Products, as they diversify their revenue streams geographically into Atlantic Canada and Quebec, and diversify by sector as they branch out into defence.
In fact, Exchange Income Corp. just recently release record first quarter financial results with a 5% dividend increase. In first quarter 2016, EIF.TO increased their net earnings by 957%.
Exchange Income Corp. has been increasing their dividends since 2004. They kept the dividend consistent during the 2009 – 2010 financial crisis time, which is completely understandable considering the Big Five Canadian banks all did the exact same thing. Effectively, EIF.TO has increased their dividend 11 times in the past 12 years, raising the dividend from $1.08 in 2004 to $2.01 in 2016.
Investors need not worry about the dividend being cut either, due to their intelligent acquisitions and allocation of capital, EIF.TO has significantly reduced their payout ratio in the past couple of years to the point that they may begin to increase the dividend growth in the near future.
EIF.TO calculates their payout ratio from Free Cash Flow minus maintenance capex. In Q1 2016, payout ratio was 79% versus 109% in 2015. The trailing twelve month payout ratio is even 20% healthier, at a mere 59%. Due to their most recent 5% increase, they have increased their dividend by 20% in the last 18 months.
TransAlta Renewables Inc.
TransAlta Renewables Inc.(RNW.TO) is the result of a spin-off from TransAlta about three years ago, much like Enbridge Income Fund Holdings is to Enbridge.
TransAlta has dropped down the majority of their renewable energy facilities to TransAlta Renewables, and they are currently investing in bringing online their South Hedland power station in Australia.
Once South Hedland is online, RNW.TO has already announced they expect to increase the dividend by 6% to 7% in the coming year.
Every year since their IPO, RNW.TO has increased their dividend. Even disregarding the dividend growth attributable to RNW.TO, the stock currently yields 6.8% and pays out dividends monthly.
With the election of the Liberal government in Canada, renewable energy has been a very hot topic as they are very clear in their intentions to transition to cleaner energy.
Compared to the other renewable energy stocks in Canada, TransAlta Renewables Inc. was the clear winner to me. Hold the stock and collect that growing dividend as you make a positive impact on the world and the environment; I find it personally rewarding to be a part of something bigger than myself, even in this small way.
In Q1 2016, comparable cash available for distribution (CAFD) per share increased to $0.37 from $0.28 in 2015, an increase of 32.14%. Dividends paid per common share increased from $0.19 to $0.22, a 15.79% increase. Given that $0.22 was paid out in dividends from their comparable cash available for distribution of $0.37, the payout ratio for RNW.TO in Q1 2016 was 59%. RNW.TO has a target payout ratio of between 80% and 85%, so there is a ton of room for future dividend growth.
Not to mention, TransAlta Renewables Inc. is significantly diversified in both geography and fuel type. The majority of their cash flows, however, come from Eastern Canada Wind and Western Australia. Wind and Gas-Fired are their primary fuel types.
Alaris Royalty Corporation
Alaris Royalty Corporation (AD.TO), self-dubbed the “Optimal Dividend Stream”, provides capital to profitable businesses in need of cash in exchange for cash distributions through preferred equity positions.
In the past 52 weeks, AD.TO shares have shed 15% of their value, but YTD AD.TO is up a fantastic 20%. This just goes to show you it really is important at what price you buy and at what price you sell. Not to mention, investors who bought AD.TO at the bottom (I was one of them), benefited from a humongous yield north of 7.00%, which has now been squeezed to a still high 5.6%.
Much like Exchange Income Corp., AD.TO has a narrowly defined partnership criteria so that they make good decisions and don’t get burned; this includes:
- The partner should have services or products that are profitable in various economic conditions
- A track record of free cash flow
- Low risk of declining asset base
- A dedicated management team and low levels of debt
Alaris Royalty Corp. is dedicated to diversifying their revenue stream, and wishes to have no partner contribution more than 10% to their revenue in the off-chance that one of their partners has issues – in this case, their revenue stream would not be affected in a huge way. They currently have 16 revenue streams; out of which 3 are above 10% of revenue.
Alaris’ revenue is decently diversified, for a Canadian company; 69% of revenue is from the U.S., while 18% comes from Canada and 13% internationally.
AD.TO has increased their dividend 8 consecutive times since 2010, for a total increase of 79%. While payout ratios have remained consistently high, above 80% and usually in the low 90s, AD.TO is expecting a 77% payout ratio in 2016, which would be it’s lowest ever. In addition, they sport a 14% 5 year CAGR to their dividend. Alaris is also the largest position in my stock portfolio.