Roughly half the companies in the Canadian Edge coverage universe have raised dividends at least once since Jan. 1, 2011, when the new tax on income trusts launched a wave of conversions to corporations.

Those 83 companies have increased payouts by an average of 37.9 percent over that time, and their total return has been a robust 34.8 percent. That’s roughly three times the gain for the S&P 500 Index, and it compare to a 1.1 loss for the broad-based S&P/Toronto Stock Exchange Composite Index.

Not surprisingly, the dividend growers’ performance stands in marked contrast to that of the dividend cutters I highlighted in the March 2013 In Focus feature.

But their showing against the broad universe of companies demonstrates a critical fact: Nothing pushes a dividend-paying stock higher more reliably than a rising payout.

In the near term stock prices reflect investor sentiment more than anything else. Any number of factors can push a stock higher or lower. Over the months and years, however, rising dividends push a company’s baseline value higher.

Long-term investors in these stocks therefore get the best of both worlds. A rising dividend boosts their cash flow, even as the value of their capital increases. And you need do nothing else but buy and hold to get the benefit.

So long as the companies in the table “Dividend Growers” continue to raise dividends, their stocks should move higher over the long term. A brief glance, however, reveals that hasn’t been the case for every company over the past two years plus. In fact, 16 of these stocks are actually underwater since Jan. 1, 2011.

That begs the question if something has happened to break the relationship between dividend growth and rising stock prices in Canada. Fortunately, the answer is “no,” as the other 67 companies in the table say in a very definitive way.

But there are definitely some nuances that will be critical to investment success in 2013 and beyond.

Growth Plus Reliability

Let’s start with the 67 companies that have both raised dividends and enjoyed solid stock market gains since Jan. 1, 2011.

Real estate investment trusts (REIT) accounted for the largest number of them with 10. Banks and other financials were second with nine, followed by midstream energy companies with seven, electric power with six and transportation companies with five.

Four companies from the communications, energy services and natural resources sectors met the grade, and the rest hailed from a range of businesses, including restaurant franchising.

As for the companies that raised dividends but failed to get any credit in the marketplace, six were oil and gas producers.

Five are natural resource producers and three are energy services companies.

The other is a mutual fund focused on energy producers, ACTIVEnergy Income Fund (TSX: AEU-U, OTC: ATVYF).

Put another way, every electric power company, REIT, pipeline, financial, communications and transportation company that pays a higher dividend now than it did in January 2011 is on higher ground today.

By contrast, six of the eight oil and gas producers that boosted payouts have lost money over the past 27 months.

That also goes for five of the nine companies on the list that produce natural resources besides oil and three of the seven energy services companies.

Clearly, not every REIT or power company has prospered the past two-plus years.

But those that have done well and also shared the wealth with investors as dividend increases have been rewarded in the stock market.

The same definitely can’t be said for producers of oil and gas, coal, iron ore and other resources as well as the companies that provide drilling and other services for their efforts.

We’ve divided the Canadian Edge Portfolio into Conservative Holdings and Aggressive Holdings over the years for one major purpose: to separate companies with greater exposure to commodity prices from those with little or none.

Since our first issue in July 2004 no single factor has made a bigger difference on company earnings–and therefore dividends and share-price performance–than commodity prices.

Put simply, stocks of companies with greater exposure have by and large been more volatile than those with less.

The performance of dividend raisers in “Dividend Growers” shows pretty clearly that this relationship is as strong as ever–and that it carries over even to the highest-quality companies.

It’s been a tough time to make money in the natural resources business.

Although investors have been willing to reward some of the exceptions–including Aggressive Holding Vermilion Energy Inc (TSX: VET, NYSE: VET)–they’ve punished most rivals, including more than a few that have also kept profits and dividends rising.

The upshot: At least since Jan. 1, 2011, it hasn’t been enough for a company to raise its dividend. Investors must also be confident the boost isn’t just a one-shot deal and that the company will be able to keep its good thing going.

As I’ve pointed out in past issues of CE, Canadian real estate investment trusts’ conservative financial and operating policies during the 2008-09 downturn put them in prime position to expand, in large part by buying high-quality properties from distressed owners.

Buying and building have also been aided by extremely low borrowing costs, even as rising unit prices have cut the cost of issuing new equity.

Expansion efforts continue. But a growing number of Canadian REITs have begun to pass through at least some of the benefit to unitholders as distribution increases.

Their ranks include CE Conservative Holdings Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF), Dundee REIT (TSX: D-U, OTC: DRETF) and RioCan REIT (TSX: REI-U, OTC: RIOCF). I expect Artis REIT (TSX: AX-U, OTC: ARESF) and Northern Property REIT (TSX: NPR-U, OTC: NPRUF) to follow in the next 12 to 18 months.

Reliable growth passed through as dividend increases is in effect the heart of the bull case for Canadian REITs going forward. That’s offset by the fact that investors have warmed to their story, pushing up valuations.

But all of REIT picks are buys for even the most conservative investors whenever they trade below target prices.

Energy midstream companies are another sector where dividend raisers are batting a thousand.

As with the REITs, there’s a growth story behind them that shows no sign of slowing down. There’s a chronic shortage of infrastructure to get the country’s rising oil and gas production to global markets. So long as this is the case midstream companies will have no problem signing on industry players to long-term contracts that reliably increase revenue, cash flow and distributions.

Also as with the REITs, there are no notable sector basket-cases to throw a scare into investors. Even shares of Westshore Terminals Investment Corp (TSX: WTE, OTC: WTSHF), which suspended its dividend in January for a quarter when a ship slammed into a loading berth, are nearly 20 percent higher than they were on Jan. 1, 2011.

Our Portfolio trio of AltaGas Ltd (TSX: ALA, OTC: ATGFF), Keyera Corp (TSX: KEY, OTC: KEYUF) and Pembina Pipeline Corp (TSX: PPL, NYSE: PBA) has consistently been among our top performers. And all have raised dividends and realized share price gains.

The key challenge they’ve posed is share price, as growing popularity has triggered buying momentum. But our pipeline holdings are all super buys on a dip to target prices.

Canada’s banking system is still among the world’s strongest, despite the handwringing we sometimes hear from bears. And banks and other financials that have raised dividends have reliably been rewarded with share price gains.

We have one Portfolio representative that’s both raised dividends and enjoyed a share price bump since January 2011, Davis + Henderson Income Corp (TSX: DH, OTC: DHIFF), which provides a range of service to the banking system. Davis + Henderson currently trades below my buy target of USD22.

So does a frequent How They Rate recommendation that’s boosted, Bank of Nova Scotia (TSX: BNS, NYSE: BNS). Scotiabank is a buy up to USD60.

Dividend growth plus reliability is the formula for superior share-price gains at all of these companies. And it is as well for all of the other dividend increasers showing gains post-January 2011.

Not every company in these sectors has thrived. TransForce Inc (TSX: TFI, OTC: TFIFF) has emerged as a transport powerhouse, Canada’s big rail companies have boomed, and WestJet Airlines Ltd (TSX: WJA, OTC: WJAFF) has captured a growing share of airline traffic.

Chorus Aviation Inc’s (TSX: CHR/B, OTC: CHRVF) dividend, however, continues to hang by a thread amid a dispute with Air Canada (TSX: AC/B, OTC: AIDIF) and tough competition.

Brookfield Renewable Energy Partners LP (TSX: BEP-U, OTC: BRPFF) has grown reliably by adding new wind and hydro capacity.

But other power sector companies, such as Atlantic Power Corp (TSX: ATP, NYSE: AT) and Capstone Infrastructure Corp (TSX: CSE, OTC: MCQPF), have been unable to renew contracts in an environment of very low wholesale power prices.

Capstone cut its dividend in early 2012, and Atlantic followed suit in March of this year.

Investors, however, have viewed these stumbles as anomalies particular to the individual companies rather than as potential problems that are endemic sector-wide.

As a result, even as floundering companies have been quickly punished so have winners been rewarded.

Resource Risk and Reliability

That’s a stark contrast to natural resource-oriented sectors, such as oil and gas production and mining. There the bar for reliability has been much higher. It’s arguably more difficult to meet than ever.

Only two of the eight oil and gas producers raising dividends the past 27 months are on higher ground than they were January 2011. The fact that Vermilion Energy is one of them shouldn’t surprise anyone.

The market is well aware that Vermilion sells the vast majority of its energy outside of North America and has therefore been relatively unaffected by sliding natural gas prices and record differentials between the price of Canadian oil and benchmark West Texas Intermediate crude.

Vermilion was also one of just two former oil and gas producer trusts that weathered the 2008-09 crash and converted to a corporation without cutting its dividend.

That’s an extraordinary level of reliability in an industry that’s seen the price of its primary product–oil–fluctuate between USD30 and USD150 a barrel over the past five years. And that’s not to mention the crash in natural gas from mid-teens per million British thermal unit to less than a dollar in some regions of Canada last year.

The other sector dividend grower with a gain is Bonterra Energy Corp (TSX: BNE, OTC: BNEUF), which is up just marginally despite raising its payout three times over that period for a total of 27.3 percent. And the stock is well off its high above CAD65 reached in early 2011.

As for the six oil and gas producer/dividend growers that are underwater from January 2011, the biggest loser is something of a special situation. The former Pace Oil & Gas Ltd owes its dividend increase to a merger with AvenEx Energy Corp and junior producer Charger Energy Corp to form Spyglass Resources Corp (TSX: SGL, OTC: PACED).

The new company’s dividend is a 37.5 percent haircut from AvenEx’s former payout but a 100 percent boost for Pace, which had previously paid nothing.

Pace, like AvenEx, has lost considerable ground the past couple years as a small producer. This merger won’t entirely remedy the size challenge, but as I point out in Dividend Watch List it is an improvement. And the new dividend rate should hold.

More substantial companies that raised dividends are also well underwater. That includes Canadian Natural Resources Ltd (TSX: CNQ, NYSE: CNQ), Canadian Oil Sands Ltd (TSX: COS, OTC: COSWF) and Suncor Energy Inc (TSX: SU, NYSE: SU), all of which have seen their stocks trade down more than 20 percent since early 2011.

It’s hard to consider any of these payouts as being in any danger of a cut.

In fact the average payout ratio of the trio is just 23 percent, and that’s based on fourth-quarter earnings that were damaged by record price differentials.

Rather, the slide appears to be due to investor concerns about the trio’s ability to execute oil sands production plans in an environment of uncertain energy prices.

To be sure, although these companies are taking a hard look at their near-term capital spending plans in view of the current shortage of energy transportation, none have abandoned long-term growth goals.

But it appears the more averse the energy price picture seems to become, the less well the market will treat their stocks, dividend increases or no.

Energy services companies are doubly leveraged to energy prices. When oil and gas prices rise, demand for their equipment and services does, too, as producers ramp up their drilling plans. This increases both usage and the fees they can charge.

Conversely, when energy prices fall drilling is curtailed, leading to a drop in usage and fees.

The latter was definitely the case during the fourth quarter of 2012. And all indications are the slump will linger at least through the first half of 2013. As a result, energy services stocks have been under pressure for several months, including those that have demonstrably grown their businesses in recent years and shared the profits as dividend increases.

At this point we have only one energy services company in the CE Portfolio Aggressive Holdings. Fortunately, Newalta Corp (TSX: NAL, OTC: NWLTF) has rewarded us consistently as it’s grown its industry and energy-focused environmental cleanup business.

The company has been hurt by falling prices for recycled products it sells from its facilities and onsite operations. But that’s been more than offset by growth of more reliable fee-based income.

That’s a stark contrast to driller Cathedral Energy Services Corp (TSX: CET, OTC: CETEF), whose core business saw a 36.3 percent drop in revenue and 61.7 percent slide in funds from operations during the fourth quarter of 2012 due to a sharp drop in drilling activity.

Cathedral has raised its dividend by 25 percent since converting to a corporation in January 2011. But its stock is down by more than 50 percent since, as investors have worried about sustainability in a tough market and largely discounted the possibility of further boosts.

Such discounting appears to also be the case with Precision Drilling Corp (TSX: PD, NYSE: PDS), which restored its dividend in December. And it’s even true for PHX Energy Services Corp (TSX: PHX, OTC: PHXHF), which actually boosted revenue and profit in the fourth quarter as rapid growth of operations outside North America offset weakness in the US and Canada.

The other loser-heavy group of dividend increasers is natural resource producers. We currently own three sector payout boosters in our Aggressive Holdings.

Two of the three–Acadian Timber Corp (TSX: ADN, OTC: ACAZF) and Noranda Income Fund (TSX: NIF, OTC: NNDIF)–are both up substantially since early 2011 though they’re also well off recent peaks.

The third is Ag Growth International Inc (TSX: AFN, OTC: AGGZF), which is underwater largely because of a record US drought that’s depressed demand for grain-handling equipment.

Indications are we’ll see a huge rebound for Ag Growth by the second half of 2013, even as the company’s sales outside North America continue to take off. But investors appear to be taking a wait-and-see approach for now.

The biggest natural resource losers on our list are major mining companies. Weakening gold prices and some production challenges have sent Barrick Gold Corp (TSX: ABX, NYSE: ABX) down by roughly 50 percent since Jan. 1, 2011, despite two dividend increases for a total of 66.7 percent and another boost likely in May.

Uranium producer Cameco Corp (TSX: CCO, NYSE: CCJ) continues to execute on long-term plans to ramp up uranium production to meet demand from a fleet of new nuclear power plants still in various stages of construction. But despite a 42.9 percent dividend increase, its shares are also down around 50 percent.

Worst of all is Teck Resources Ltd (TSX: TCK/B, NYSE: TCK), which has raised its dividend by 50 percent, the latest step announced in November 2012. Its total return since the end of 2010: a loss of 55 percent.

Canadian mining companies are hardly alone in being out of favor with investors. We’ve seen a similar shellacking dealt out to mining stocks from Australia and South Africa to the US.

In stark contrast to early 2011, investors are extremely worried about prospective demand in China, which has become the world’s biggest consumer of a wide range of natural resources.

When it comes to key industrial materials such as copper even the US is rapidly becoming a bit player.

US industry is likely to benefit from lower resource prices resulting from China worries. But for mining companies the prognosis is abject fear, even for giants that usually benefit when sinking prices cause smaller rivals to falter. And that’s a concern not even a rising dividend can fully answer.

Buys and Bargains

There’s no better sign of a company’s underlying good health and continued growth than a dividend increase. And rising dividends are a major part of how we rate stocks in Canadian Edge–particularly when it comes to determining how high a price we’d pay for an individual stock.

As the data in “Dividend Growers” prove, dividend growth doesn’t guarantee a rising stock price, even over a relatively long period of time like 27-plus months. Investors who buy dividend growers in more volatile industries such as natural resources and oil production can wind up sitting with sizeable losses if the market mood is wrong.

That being said, it’s still a fundamental truth that so long as companies’ underlying businesses hold together their stocks will eventually rebound from any debacle, even if it’s a generational one such as what we experienced in 2008-09. And there’s no better sign of a healthy company than dividend increases.

For the 67 companies that have increased dividends and enjoyed rising stock prices since early 2011, the most important factor for would-be buyers is share price. Is it at a level that reflects a real buying opportunity, or is the price at a high level because of buying momentum?

All of these companies are tracked in How They Rate, and 21 are in the CE Portfolio. Prices in both of those tables are updated via a live feed, and I’ve listed buy targets for all of them. So long as the price is below the buy target they’re ripe for purchase, within the rules of diversification and portfolio balance.

That’s also the case for those on our list that are now underwater, including Ag Growth. Our buy targets are levels where the prospective return–dividend yield plus growth–are commensurate with reliability of returns. Companies trading below those levels are values indeed–within the rules of diversification and balance.

This market’s best bargains now are on the resource side. Differentials have wreaked havoc in the oil and gas industry, for example, hammering profits at producers and service companies alike in the fourth quarter. But as I point out in In Brief, the price gap has actually narrowed sharply in the first quarter.

Producers are understandably cautious with drilling plans given how wide the differentials did get, as they wait to see how transportation infrastructure develops. But there’s no better incentive than rising prices to step up activity. And so long as differentials remain low, that’s what we can expect, at least by the second half of 2013.

Buying and holding stocks of producers may require holding on through some downside in the next few months. That’s including sector companies with a record of dividend growth.

The difference, however, is the latter have proven their ability to weather tough times, and that makes them cheap rather than dangerous in a market where so many buy and sell by sector from 30,000 feet up.

That also goes for natural resource companies such as Barrick, Cameco and Teck. All are strong, as dividend growth demonstrates, and each is quite cheap, particularly relative to the likely value of what they have in the ground.