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Why a 4-5% Dividend Yield Is the Sweet Spot

Stocks range from high-growth stocks that pay no dividend to stocks that pay yields of 8% or higher. Then there are those that pay 4-5% yields, which is where the sweet spot is.

Why is it the sweet spot? The 4-5% dividend yield already covers for the long-term inflation rate of 3-4%. Moreover, many companies that pay that 4% yield also tend to raise those dividends because they generate stable, growing earnings or cash flows.

Essentially, these companies provide a balance of income and growth. This growth includes income growth and steady price appreciation.

Telus Corporation (TSX:T)(NYSE:TU) is one of the Big Three Canadian telecoms. At under $42 per share, it is fair to fully valued.

It pays a quarterly dividend of $0.46 per share, equating to an annual payout of $1.84 per share. At the current price, that’s a yield of 4.4%.

The company plans to continue its dividend hike every six months. Specifically, it aims to hike its dividend by 7-10% per year from 2017 to 2019.

If the dividend hikes materialize at a more conservative growth rate of 7% per year, an investment today will have a yield on cost of almost 5.4% by 2019.

Brookfield Infrastructure Partners L.P. (TSX:BIP.UN)(NYSE:BIP) is another quality company that pays a sweet-spot dividend yield. At about $56, it yields 5.2% based on today’s foreign exchange rate between the U.S. dollar and the loonie.

Even assuming the more conservative exchange rate of US$1 to CAD$1.20, the company still offers a yield of more than 4.8%.

Since it pays a U.S. dollar–denominated distribution, its distribution growth rate is actually higher when translated back to the Canadian currency.

It’s a quality business to consider for an RRSP because some of its distribution could be U.S. dividends that would otherwise experience a 15% withholding tax in TFSAs or non-registered accounts.

Brookfield Infrastructure aims to grow its distribution by 5-9% per year. In fact, its last dividend hike in the first quarter was 7.5%.

Taking the midpoint of its dividend-growth guidance range, if Brookfield Infrastructure hiked its dividend at a growth rate of 7% per year, an investment today would have a yield on cost of almost 6% by 2019, assuming an exchange rate of US$1 to CAD$1.20.

Conclusion

Telus’s 4.4% yield more than covers inflation. Its dividend growth, which is supported by earnings growth, will help it continue to maintain shareholders’ purchasing power.

Likewise, Brookfield Infrastructure’s 4.8% yield also beats inflation. The business’s growing cash flow helps support its growing distribution.

Investing $10,000 in each company today starts investors off with an annual income of $440 and $480, respectively. By 2019, while those investments should steadily appreciate, and so should your income from them–potentially increasing to roughly $540 and $600, respectively.

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Fool contributor Kay Ng owns shares of Brookfield Infrastructure Partners and TELUS (USA).

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