Three stocks with fat – and growing – dividends

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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.

I like a juicy yield as much as the next person. This column isn't called Yield Hog for nothing.

But what I'm not interested in are stocks with fat dividends that never grow. That's a recipe for a stagnant share price, mediocre total returns and a business whose best days are behind it.

Instead, I look for companies with above-average dividends that will grow over time, supported by rising sales and earnings. If the business is prospering, the growing dividend will be accompanied by a rising share price, creating wealth two ways.

As U.S. portfolio manager Lowell Miller writes in The Single Best Investment (a great introductory book for dividend investors): "Dividend growth is the critical piece in the puzzle for creating a portfolio that will serve you over the years."

With that in mind, today we'll look at three stocks with above-average yields and good prospects for future dividend growth. Mr. Miller uses a simple formula when identifying promising companies: "High quality + high current dividend + high growth of dividend = high total returns."

As a minimum, he looks for a yield that's 1.5 times the market's yield. The S&P/TSX composite index currently yields about 2.7 per cent, so to make the cut each stock had to yield at least 4 per cent.

Consider this list as a starting point for further research, and be sure to do your own due diligence before investing in any security as all stocks come with risks.

Algonquin Power & Utilities Corp. (AQN – TSX)

Price: $13.12

Yield: 4.8 per cent*

Algonquin Power & Utilities gives investors the best of both worlds: solid current income and plenty of growth potential. Raymond James rates the company a "top pick" in the power and utilities space, citing its "sector-leading growth profile and lengthy runway of attractive capital projects."

In January, the Oakville-Ont.-based operator of regulated gas, water and electric utilities and hydro, wind and solar power projects completed its biggest deal yet – the $3.2-billion acquisition of Empire District Electric Co. of Joplin, Mo.

Two weeks later, Algonquin followed up with a 10-per-cent dividend hike, extending a string of annual increases that the company aims to continue.

Even after the stock's strong gains this year, Raymond James considers Algonquin attractively valued relative to peers and has a price target of $15.

Other analyst are also bullish, with eight "buys" and two "holds" among the 10 analysts surveyed by Thomson Reuters.

The average price target is $14.07.

Another plus: The Empire acquisition, and Algonquin's listing on the New York Stock Exchange in November, should raise the Canadian company's profile with U.S. investors.

A&W Revenue Royalties Income Fund (AW.UN – TSX)

Price: $37.28

Yield: 4.3 per cent

I took my son to A&W for a Teen Burger the other day and was impressed: The service was friendly and fast, the burger, onion rings and sweet potato fries were delicious and the root beer was ice cold and served in a frosted mug.

Here's something else to like about A&W: its growing dividend.

The royalty fund – it owns the A&W trademarks, which it licenses to the operating company in exchange for a royalty of 3 per cent of sales – raised its dividend twice in each of 2015 and 2016 for a total increase of 13.7 per cent. Despite a 0.3-per-cent drop in first-quarter same-store sales amid poor winter weather and economic weakness in Alberta and Saskatchewan, analyst Elizabeth Johnston of Laurentian Bank Securities expects sales to rebound this year and projects further dividend increases of 4 per cent in 2017 and 3.5 per cent in 2018. Looking further out, there could be more hikes to come, as the Vancouver-based burger chain targets Ontario, Quebec and Atlantic Canada for expansion over the next few years.

The shares have had a big run, so buying on weakness might be the best strategy.

Telus Corp. (T – TSX)

Price: $45.68

Yield: 4.2 per cent

If you like predictable dividend growth, Telus is hard to beat. The Vancouver-based company has said it aims to raise its dividend twice a year – at an annualized pace of 7 per cent to 10 per cent – through the end of 2019. If its recent pattern continues, Telus will announce an increase along with first-quarter results on May 11. Telus excels in customer service and benefits from some of the lowest "churn" rates in the wireless industry: Customer turnover has been less than 1 per cent for the past three years. Yet the stock is reasonably priced: In an April 4 note (when Telus was trading at $43.47) , CIBC World Markets analyst Robert Bek upgraded the shares to "outperformer" and boosted his price target to $47 from $45, citing Telus's attractive valuation relative to peers. The fact that Telus is lapping easier year-ago comparisons – reflecting Alberta's economic woes in 2016 – could also help the stock. Dividend increases aren't official until the board approves them, of course, but Telus probably wouldn't be projecting dividend hikes unless it was confident in its ability to deliver.

Disclosure: The author owns AQN, AW.UN and T personally and holds T in his Strategy Lab model dividend portfolio. View it online at tgam.ca/divportfolio

*Dividend is paid in U.S. dollars. Yield calculated by converting the dividend to Canadian dollars.