Posted by BM on March 14, 2021
The “double-double” is a uniquely Canadian term that most of us attribute to Tim Hortons. It will get you a coffee with two creams and two sugars (or double cream, double sugar). If it were up to us, we would also add the term “double-double” to the growing list of all the things we have found magical about dividend growth investing (DGI).
When we started the Magic Pants Wealth-Builder (CDN) dividend growth portfolio eight years ago, we knew we would be provided with stable growing income in the years ahead, but it was difficult to imagine the total returns we would end up receiving on some of our initial DGI picks. We had no idea at the time what the price today would be for the DGI stocks we purchased then. Our research at the time told us that if past performance was any indication, we could expect our portfolio income to double in ten years and that was fine with us.
What we had not discovered back in 2012 and something that makes dividend growth investing truly magical, was that the price of a stock also tends to rise as the dividend grows. Price and income for both Franco Nevada (FNV) and Magna (MG) have already doubled with Magna’s price doubling for a second time.
Think how comforting it is to know that as an investor you only need to track one metric to measure your short-term performance; How much did my income rise last year! Price growth and total return will come, you just have to be patient.
The chart below shows the dividend and price growth of the stocks we purchased in 2012 and 2013 when we was just starting out with dividend growth investing. The highlighted ones (FNV, MG) have recently joined our ‘double-double’ club.
Having your stocks join the ‘double-double’ club in less than ten years is certainly exciting but how do you know which stocks are more probable to achieve this status than others?
Selecting quality companies with at least 10+ years of consecutive dividend growth is always a good place to start. Next, we look for historical dividend growth rates in the 6-8% range, or if the yield is lower, a bit higher. From there we let the magic of compounding take effect. If we can find stocks with a history of increasing their dividends more than 7.2% annually (Rule of 72) then we are well on our way to doubling our income over the next ten years. Not all our stocks will double both their income and price over the ensuing ten years, but a well-constructed portfolio selected primarily on dividend growth is more likely than not to achieve this goal.
