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The best investment advice I've ever received is also the best advice there is, period.
Buy dividend growth stocks. It's simple, strikingly productive and well-suited to many different types of investors. A favourite example of how well this strategy has worked in my own investing is Manulife Financial, the insurance and financial services giant. I bought Manulife shares for my RRSP in October 2003 the quarterly dividend has more than doubled since then, and so has the share price. There's a connection here that we'll get to shortly.
Like many investors, my attention was drawn to dividend stocks in the early days of this decade, when the stock markets were regurgitating the excesses of the technology mania. Dividend-paying blue chips were practically relegated to buggy whip status at the height of tech boom, but their stability looked like just the thing as a three-year bear market got underway.
Dividends are great they provide tax-advantaged income that can keep your portfolio buoyant even while the markets are sinking. But dividend growth investing is a more refined concept. One of the first proponents of this style of investing I came across was Tom Connolly, publisher of the Connolly Report newsletter (it's a personal favourite among investing newsletters, but it's not accepting new subscriptions). Mr. Connolly's philosophy is that the best companies to invest in are the ones that are successful and financially strong enough to increase their dividend payments on a regular basis, say every year or so.
Manulife is such a stock. I bought it just after the company announced its merger with Boston-based John Hancock Financial Services. Adjusted for a stock split last year, the price I paid was $19.69 a share. Manulife was a dividend payer at the time, but the yield was a somewhat anemic 2.1 per cent. Time, and dividend growth, has taken care of that quite nicely.
Over the past four years, Manulife has cranked up its dividend six times. Shareholders now get 24 cents a share each quarter, up from 10.5 cents when I bought in (again, this is on a split-adjusted basis). Net result: those shares I purchased back in 2003 now have a dividend yield of 4.9 per cent. To put that in context, you'll have to shop 'til you drop to get a five-year guaranteed investment certificate paying that much and you can forget about finding any government bonds in that range.
Those dividend increases have done more than increase the flow of income into my portfolio, though. They've also helped feed a steady rise in the price of Manulife shares. With the stock at $41.25 in early December, my theoretical capital gain was close to 110 per cent in total, or better than 20 per cent on a compound average annual basis.
This is what dividend-growth stocks do. In fact, many of them exhibit a close correlation between the percentage amount of their long-term dividend increases and their simultaneous share price gains. The longer you hold these stocks, the better this total return of dividends and capital gains looks.
Today's choppy stock markets offer an ideal time for investors to get started with dividend-growth investing. The first step is to identify the best dividend growers and the next is to catch them at a time when they're depressed in price (as a stock's price falls, its dividend yield rises). The big banks are stellar dividend-growth stocks and they've had mediocre to poor years, depending on the bank, as a result of concerns flowing out of the subprime mortgage mess in the United States. Other dividend-growth stalwarts to keep an eye on include Power Financial, Tormont Industries, AGF Management, Canadian National Railways, Shaw Communications, Reitmans, Sun Life Financial and, of course, Manulife.
The best investment advice you'll ever get is to own the shares of dividend growers like these. Buy them, hold them and watch them do their thing. Over time, good things should happen.
Rob Carrick has been writing about personal finance, business and economics for more than 12 years.