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Three dividend-growing stocks that yield more than 5%

The majority of top stock pickers can’t maintain their superior performance over a couple of years, according to a new report.

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John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.

What's better than a stock with a fat dividend? A stock with a fat dividend that gets even fatter with time.

Contrary to what you may have heard, not all companies with outsized yields are stodgy and slow-growing. Some stocks deliver the best of both worlds: a high initial yield and a dividend that continues to grow.

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For investors, it's a potent combination.

In his book The Single Best Investment: Creating Wealth with Dividend Growth, U.S. money manager Lowell Miller refers to dividend growth as "the electricity that will make your compounding machine run."

"What makes rising income that comes from a growing dividend so attractive in a yield stock? You not only receive greater income as the years go by, you also get a rising stock price – because the instrument producing the income (the stock) is worth more as the income it produces increases," Mr. Miller writes.

Today, I'll be discussing three stocks that offer a juicy yield of more than 5 per cent and the strong possibility of future dividend increases. As you'll see, two of these companies even specify how much they expect to hike their distributions every year.

Dividend increases aren't official until the board approves them, of course, but when a company projects dividend growth for several years into the future, it's a strong signal of confidence. It's important to do your own due diligence before investing in any security, so treat this list as a starting point for further research.

Enbridge Income Fund Holdings Inc. (ENF-TSX)

Price: $33.05

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Yield: 5.6 per cent

Enbridge Income Fund Holdings owns stakes in oil and gas pipelines, oil-storage facilities and renewable-power assets operated by Enbridge Inc. The best part? Because the assets are either regulated or contracted on a long-term basis, they throw off predictable and growing cash flows. In a recent note, CIBC World Markets analyst Robert Catellier called ENF "a higher payout, lower volatility option through which to invest in Enbridge's core Canadian assets." Although parent Enbridge – which periodically "drops down" assets to the income fund – is generally seen as the more growth-oriented of the two stocks, ENF is no slouch: Based on projects under development, it expects to boost its dividend at a compound annual rate of 10 per cent through 2019. Analysts see it as a relatively low-risk income play. "We view the dividend as sustainable on a long-term basis given the high quality and long economic life of the underlying assets," Desjardins Securities Inc. analyst Justin Bouchard said in a note.

Pizza Pizza Royalty Corp. (PZA-TSX)

Price: $15.23

Yield: 5.6 per cent

You might say I have inside information about Pizza Pizza: I've put a lot of its pizza inside my stomach over the years. Not only that, but I live down the street from a Pizza Pizza franchise that's packed with high school kids every lunch hour. Pizza never goes out of style, which is one reason the company can raise its dividend regularly – seven times since 2012, in fact. Keep in mind that when you buy shares of Pizza Pizza Royalty, you're not investing in the restaurant chain itself but a corporation that owns the trademarks, which it licenses to the operating company in exchange for a royalty of 6 per cent of sales (or 9 per cent in the case of Pizza 73 in Western Canada). The dividend hikes aren't huge – the most recent one, announced in June, was 2.3 per cent – but the royalty model generates a relatively stable stream of cash. One concern is that sales in Alberta have tumbled because of the oil slump. When the company releases third-quarter results on Wednesday, investors will be watching same-store sales closely as they are a key driver of both the stock price and dividend growth.

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Brookfield Renewable Partners LP (BEP.UN-TSX)

Price: $38.96

Yield: 6 per cent

Soaring electricity bills got you down? Brookfield Renewable's rising distribution will help you fight back. Controlled by deep-pocketed parent Brookfield Asset Management Inc., Brookfield Renewable operates 260 renewable-power facilities in North America, South America and Europe, with hydro (88 per cent) and wind (11 per cent) accounting for virtually all of the output. The partnership's geographic diversification helps to smooth out earnings, as does the fact that 90 per cent of its generation is contracted – with an average length of about 16 years and built-in inflation escalators. Thanks to organic expansion, acquisitions and project developments, Brookfield Renewable has hiked its distribution at a compound annual rate of 6.5 per cent over the past five years and aims to continue raising it by 5 per cent to 9 per cent a year. Third-quarter results were weaker than expected (largely weather-related), sending the units down sharply, but analysts remain optimistic. Brookfield Renewable "offers a high-quality, diversified asset portfolio and provides stable, long-term cash flows/distributions," Bill Cabel of Desjardins Securities Inc. said in a note. With the partnership now investing in solar and also eyeing potential expansion in India, there's plenty of growth ahead.

Disclosure: The author personally owns share of ENF, PZA and BEP.UN.

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About the Author
Investment Reporter and Columnist

John Heinzl has been writing about business and investing since 1990. A native of Hamilton, he earned a master's degree from the University of Western Ontario's Graduate School of Journalism and completed the Canadian Securities Course with honours. More

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