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Rob Carrick

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Stealth yield

Rob Carrick

 

OTTAWA (GlobeinvestorGOLD) — Patience, my yield-hungry friends. If you bide your time, you can earn high levels of income from some surprising places.

Let's call the strategy at work here "stealth yield." All you do is buy the shares of a company that regularly increases its dividend and then wait. Over the years, the rising dividends will have the effect of steadily raising the yield on your initial investment. Over a 10-year span, you will end up making higher levels of income than if you bought more conventional yield plays like bonds, guaranteed investment certificates or even income trusts.

There are really two types of dividend stock — those with high yields and little or no dividend growth and those with lower yields and regular, reliable dividend growth. There's no better example of the latter variety than financial stocks such as the banks or Power Financial Corp., which is a holding company for the likes of London Life Co., Great-West Lifeco, Canada Life Assurance Co. and IGM Financial, which includes the mutual fund giants Investors Group and Mackenzie Financial.

Power Financial's quarterly dividend was 3.625 cents at the end of 1994 (adjusted for stock splits), which compares to 21.75 cents for the quarterly dividend that will be paid on Nov. 1. The company's split-adjusted share price at the end of 1994 was $3.50, which means the dividend yield on the shares at the time was about 4.1 per cent. A 4-per-cent dividend yield from a quality company like Power Financial is virtually unheard of in today's market, but forget about that. Through the magic of stealth yield, someone who bought those $3.50 Power Financial shares at the end of 1994 would now enjoy a yield of 24.8 per cent.

Power Financial has increased its dividend annually for 13 straight years, so as a long-term shareholder you would have seen your yield climb steadily. Compare that with a five-year Government of Canada Bond bought in December 1994, which would have yielded a hefty 9 per cent or so. You'd have made out better with the bond initially, but when you rolled it over into a new five-year Canada bond in December of 1999, you would have received a reduced yield in the area of 6 per cent. While bond yields were falling, Power Financial was pumping out higher dividends and thus more income for its shareholders. True, the Government of Canada bond would have been a safer investment. But with a record of regular annual dividend increases over more than a decade, Power Financial has proven itself a successful well-run company. There are no guarantees that this will continue, but the history is persuasive.

If the idea of stealth yield interests you, pay less attention to a stock's current dividend yield than its history of dividend increases. Any serious blue-chip company will have a history of its dividend payments located in the investor relations area of its website (you can get corporate web addresses from the company snapshots found in the Quotes area of GlobeinvestorGOLD.com ). Companies that have cut their dividends are almost certainly not candidates for providing stealth yield (TransCanada Corp. might be an exception), and neither are companies that only increase their payouts once in a blue moon. Ideally, there will be increases one per year at least.

Stealth yield won't provide the immediate gratification of a higher-yielding income trust, dividend stock, bond or guaranteed investment certificate, but be patient. In 10 years, you could be reaping the sort of double-digit yield that most investors would kill for if only they could find it.

Rob Carrick has been writing about personal finance, business and economics for more than 12 years.

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