Thought Leadership

For Sale: Dividend Growth

We believe that the time is right to consider buying high-quality dividend growth stocks. Good companies will continue to grow their dividends regardless of what happens to their stock prices and regardless of what happens politically or in response to other short-term related issues.

2018 was a bad year for almost every asset class, including dividend growth stocks. As a result, these companies have become cheaper to acquire.

At the supermarket, if you see an item on sale, the natural response is to want to buy more because you are getting a good deal. The same common-sense approach should also apply to dividend growth stocks. Furthermore, if the income from dividends grows significantly, similar to the aggregated growth of the Bristol Gate US Equity strategy, which has seen dividend growth at almost 20% annually for the last nine years and the Bristol Gate Canadian Equity strategy, which is seen dividends grow at over 12% annually in the past five years, you can see that your income as an individual investor will grow very quickly.

With time, this income growth is reflected in what we call yield on cost, the magic of compounding your income that leads to significant rising cash for the investor to receive annually.

Unlike bonds, dividend growth stocks that increase their dividends year after year, provide an ever-increasing return on investment. Consider a $20 stock paying a $0.40 annual dividend – a 2% yield. If that company grows its dividend at 10% annually, the dividend will grow to $2.69 after 20 years. The annual yield on the original cost of the investment will rise from 2% to over 13%.

In addition, there are important tax efficiencies with dividend growth securities that are well selected. Unlike a lot of portfolio activity based on short-term underlying assessments of stock price and whether they are cheap or expensive, dividend growth stocks continue to raise income and overtime stock prices reflect this fast and high growing stream of money. Furthermore, when a stock is in the growth phase of its dividends there is often little need to sell those names, leading to a higher tax efficiency by limiting portfolio turnover.

So what is the secret to finding these types of companies? Great companies generate excess capital from their businesses allowing them to reinvest in their operations while having enough left over to share with investors through growing dividends. The same companies go to work every day with the goal of increasing revenues and profits regardless of where their stock price happens to be.

Although recessions and specific direct challenges to individual businesses may halt the growth of dividends, the job of our investment managers is to estimate how these companies will behave during these periods and avoid companies that may potentially cut their dividends or stop increasing them.

Since inception almost 10 years ago, Bristol Gate has never owned a company that cut its dividend while in our portfolio.

Price declines like 2018 should be viewed as a good entry point for dividend growth investors. The lower price means you get more income for each dollar invested which should lead to better long-term income and returns.

This post is presented for illustrative and discussion purposes only. This post should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities and it does not consider unique objectives, constraints, or financial needs of the individual. Under no circumstances does this post suggest that you should time the market in any way or make investment decisions based on the content. Investors are advised that their investments are not guaranteed, their values change frequently, and past performance may not be repeated. References to specific securities are presented to illustrate the application of our investment philosophy only, do not represent all of the securities purchased, sold or recommended for the portfolio, and it should not be assumed that investments in the securities identified were or will be profitable and should not be considered recommendations by Bristol Gate Capital Partners Inc. The information contained in this post is the opinion of Bristol Gate Capital Partners Inc. and/or its employees as of the date of the post and is subject to change without notice. Every effort has been made to ensure accuracy in this post at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and Bristol Gate Capital Partners Inc. accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. We strongly recommend you consult with a financial advisor prior to making any investment decisions. Please refer to the Legal section of Bristol Gate’s website for additional information at

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