This Dividend Stock is up 868% -- And it Still Has Room to Run

You’ll often hear naysayers, trolls, and other anti-dividend folks say you can only get good returns by owning high growth stocks.

I’m the first to admit that, yes, high growth stocks have performed better than my stodgy dividend payers, especially in the last few years. It’s a fact; I won’t try and deny it.

However, that doesn’t mean all dividend stocks are dogs. My boring portfolio continues to hum along — delivering consistent dividend increases, solid capital gains, and, most importantly, allowing me to sleep well at night.

In fact, there are all sorts of Canadian dividend stocks which have delivered excellent total returns. I know because I have a bunch of them in my portfolio.

For instance, I personally:

• Purchased Imperial Oil shares for $31.xx in 2019. Those shares are worth nearly $100 as I write this, plus I collected dividends the whole time

• Bought National Bank shares for $50.xx during the COVID meltdown of 2020. Those shares are worth $116 as I write this, plus they paid generous dividends

• Acquired DRI Healthcare shares for $7.xx in 2022. Those shares are worth more than $15 as I write this, plus they’ve paid $1.85 per share in dividends

There’s more, of course, but you get the idea.

Dividend investing can be even more impressive if you look over the long-term. There are countless stories of investors buying conservative, boring, blue-chip dividend stocks over long time frames and ending up fabulously wealthy.

Like my buddy Jim — who leveraged a valuable skill, his own business, and steady investments into a $3M+ portfolio. This portfolio pays him approximately $130,000 per year.

And it’ll pay him an ever-increasing income stream for the rest of his life, too.

Today I’m going to profile one seemingly boring Canadian dividend stock — a company that has quietly delivered excellent returns all while paying out most of its earnings via dividends.

How much is it up? This stock has returned 868% since 2009*, assuming you reinvested dividends. That’s a gain of more than 16% per year. Even if you didn’t reinvest dividends, total returns from this stock would’ve exceeded 12% per year.

*Returns from June 1st, 2009 to May 31st, 2024

Let’s take a closer look.

Like a bank… but completely different

I won’t bury the lede. Today’s stock is First National Financial (TSX:FN), a small-cap mortgage lender many of you have never even heard of.

But don’t let its relatively small size fool you. The company is a solid performer, and is well deserving of blue-chip status.

Established in 1988, First National offers single family, multi-unit, and commercial mortgages to Canadian borrowers exclusively through mortgage brokers. The brokers do all the legwork, and they submit the deals directly to the company’s underwriters.

This business model is pretty attractive for a few different reasons.

Firstly, it’s more efficient than having a million bank branches scattered around the country. Lower costs translate into better mortgage rates, which is really all borrowers care about.

Secondly, there’s virtually zero marketing costs. First National markets to mortgage brokers, not customers. Its far cheaper to butter up a few thousand brokers than try and acquire millions of customers.

There’s more. First National has evolved into essentially a middleman between large institutional investors and mortgage borrowers. These large investors like investing in Canadian mortgages, which are generally safe investments that throw off steady cash flows. And First National is happy to service these mortgages for a small fee.

I want to emphasize this last point because it’s a massive advantage. First National can grow pretty much forever using institutional money. This removes risk from its balance sheet and puts it in a unique position where it can grow loans under administration without using much of its own capital.

Long-term growth of mortgages under administration has been deceptively good. A decade ago, at the end of 2013, First National had $75.6B in mortgages under administration. These days, that number is more than $140B, and should surpass $150B in 2024.

And remember, First National doesn’t just get paid on mortgages it manages for others. It also gets paid for every mortgage it originates, and it keeps a certain number of loans on the balance sheet — long-term mortgages issued to solid, high-quality Canadian borrowers.

It combines to create a high-quality business that doesn’t need much of its own internal capital to expand. This means it can grow while continuing to pay out much of its own earnings back to shareholders in the form of generous dividends. And the three diverse income streams help protect earnings when real estate activity is weak… like it was in 2022.

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A dividend machine

First National is one of the best dividend stocks in Canada — especially for those investors who are looking for higher yields.

As it stands today, First National has a 6.7% yield. It’s a sustainable payout, too, with the payout ratio checking in at just under 70% of projected 2024 earnings.

First National has grown the dividend over time, too, telling investors it has hiked the dividend 16 times since its 2006 IPO. The payout today is a hair over $0.20 per share, and was just raised in November. It’ll likely be raised the next time November rolls around, too.

But wait. There’s more. First National regularly pays out special dividends, and has done so since 2017. A summary of those special dividends on a per share basis is below:

• 2017: $1.25

• 2018: $1

• 2019: $0.50

• 2020: $0.50

• 2021: $1.25

• 2022: $0

• 2023: $0.75

• Total: $5.25

Combine those with First National’s regular dividend, and it paid $19.86 per share in dividends from 2017 to 2023. And it did so while still growing earnings per share — which expanded from $2.94 per share in 2016 to $3.94 per share in 2023.

To put this into perspective, First National shares traded between $25 and $30 in 2017. Meaning, in just a few years, investors who bought then will get their entire investment back in dividends. They’ve already gotten 2/3rds of their capital back.

Oh, and the stock is up in the meantime, with shares trading at approximately $37 each as I write this.

Speaking of that…

Great long-term returns, too

As mentioned earlier, First National has delivered solid total returns.

Like, really solid.

Since 2009, the stock has gained 868%, including reinvested dividends. That works out to a little over 16% per year.

I’m not going to promise First National will deliver similar returns over the next 15 years. In fact, the stock is pretty much flat over the last couple years, and is down compared to 2021’s all-time high.

But this is still a great company with very real growth potential. Canada’s real estate market should continue to perform fairly well, buoyed by immigration, baby boomers transferring wealth to their kids (and grandkids), and general economic growth.

First National also has a unique business model that should allow it to gobble up more mortgage market share as the years go on.

And remember, First National is in the unique position where it doesn’t need gobs of cash to grow its business. It can simply keep doing what it does best — tapping institutional investors for cash to lend to mortgage borrowers, and get paid in three ways:

• Commissions on each new loan issued

• Ongoing fees to service these mortgages

• Interest from the mortgages it has on the balance sheet

These earning sources have steadily expanded over time, and they should continue to grow, too.

The bottom line

First National is an excellent company that continues to be led by its two co-founders, Stephen Smith and Moray Tawse. Together, the two men control the company and own approximately 71% of shares outstanding.

It is a proxy on Canadian real estate, which should improve as interest rates fall. And it has multiple growth angles, including based on the real estate market itself, and mortgage brokers continuing to take share away from large banks.

And remember, this is still a relatively small company. It’ll likely surpass $150B in mortgages under administration in 2024. Meanwhile, Canadians owe more than $2.1T (yes, that’s a T, for trillion) in mortgages.

It has about 5% of the market, and the market will grow over time, too.

And if that wasn’t enough, this is a company serious about delivering dividends back to its shareholders. It has paid more than $20 per share back to its shareholders since the beginning of 2017 — and grown earnings at the same time.

This is a great company, and I plan to own it for a very long time. It’s that simple.

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