TFSA Investors: Don’t Bother With Dividend Stocks That Don’t Raise Their Payouts

BCE Inc (TSX:BCE)(NYSE:BCE) is a top dividend stock not only because it provides investors with a solid payout but because it increases it as well.

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Dividend stocks can be terrific sources of income for your portfolio. Take a stock like BCE Inc (TSX:BCE)(NYSE:BCE) for instance. The stock is currently paying a quarterly dividend of $0.8325, which currently yields around 5.9% annually.

It’s a fairly high yield, especially for a safe blue-chip stock like BCE. What makes the dividend stock an even better buy is that it routinely increases its payouts as well.

If we go back three years ago, BCE’s quarterly dividend was $0.7175. Since then, it’s gone on to increase by more than 16% since then, which averages out to a compounded annual growth rate of more than 5% per year. The benefit for investors is that over the long term, they’ll be earning more on their initial investment.

If BCE continued that rate of increase, it would take less a bit less than 15 years for its dividend payments to double. Not only do you get paid more, but with an increase of 5% per year, it’ll likely offset the rate of inflation as well.

How inflation can chip away at your returns

Let’s assume you didn’t invest in a stock like BCE and instead owned shares of a dividend stock that paid 5% today, but never increased its payouts. Here’s the impact of your dividend (after inflation) over the years, assuming that inflation stays constant at 2% per year:

Dividend Yield
Today 5.00%
Year 1 4.90%
Year 2 4.80%
Year 3 4.71%
Year 4 4.61%
Year 5 4.52%
Year 6 4.43%
Year 7 4.34%
Year 8 4.25%
Year 9 4.17%
Year 10 4.09%
Year 11 4.00%
Year 12 3.92%
Year 13 3.85%
Year 14 3.77%
Year 15 3.69%
Year 16 3.62%
Year 17 3.55%
Year 18 3.48%
Year 19 3.41%
Year 20 3.34%

After 10 years of inflation, your inflation-adjusted dividend yield would be closing in on 4%, nowhere near the 5% when you first bought the stock. And by the end of year 20, the yield would be just over 3.3%.

While inflation numbers can and will vary, the point is to show dividend stocks that don’t increase their payouts aren’t nearly as appealing for long-term investors as stocks that increase their payouts are.

With BCE, the stock’s been increasing its payouts at a higher rate than inflation and investors would effectively be seeing their inflation-adjusted dividend rate increase over time, rather than decrease.

In that case, investors are benefiting from a real increase in their dividend income. And if you hold that investment inside of your TFSA, then all that dividend income would be tax-free.

High dividends may be enticing, but they can also be risky

Stocks that grow their dividends typically don’t have high yields that are more than 5%. However, with the markets off to a rough start in 2020, it’s led to some depressed stock prices, which is why BCE and other dividend stocks are paying a bit higher than they normally have in the past:

BCE Dividend Yield Chart

BCE Dividend Yield data by YCharts

Generally, stocks that pay high yields can be risky because cuts can be around the corner, and we’ve seen many dividend cuts and suspensions already this year. It’s another reason for investors to stock to dividend growth stocks.

Since they grow their payouts, they’re careful not to offer too high of a payout that can be problematic to increase over the years.

And for TFSA investors, consistency and reliability is key, which is why dividend growth stocks are far superior to stock that don’t raise their payouts regardless of the yield that they pay today.

Should you invest $1,000 in BCE right now?

Before you buy stock in BCE, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and BCE wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $20,697.16!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 29 percentage points since 2013*.

See the Top Stocks * Returns as of 3/20/25

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor David Jagielski has no position in any of the stocks mentioned.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Dividend Stocks

protect, safe, trust
Dividend Stocks

How I’d Allocate $1,000 in Defensive Stocks in Today’s Market

These defensive stocks are outperforming the broader market despite economic uncertainty, providing stability, income, and growth.

Read more »

Piggy bank and Canadian coins
Dividend Stocks

Where I’d Invest My Savings in the TSX Today

These two TSX stocks would be my first picks if I were putting more money into the stock market today.

Read more »

Paper Canadian currency of various denominations
Dividend Stocks

How I’d Adjust My Portfolio to Benefit from Canadian Dollar Movements

TSX stocks benefit from Canadian dollar movements, although the loonie will be under pressure in 2025 due to trade uncertainty.

Read more »

Canadian Red maple leaves seamless wallpaper pattern
Dividend Stocks

5 Canadian Dividend Stocks to Buy and Hold for the Next 20 Years

These Canadian stocks have paid dividends for decades, making them reliable investments to generate regular passive income.

Read more »

Dividend Stocks

3 Canadian REIT Stocks to Buy and Hold for the Next Quarter-Century

These three Canadian REITs trade cheaply and are highly reliable, making them some of the best stocks you can buy…

Read more »

A train passes Morant's curve in Banff National Park in the Canadian Rockies.
Dividend Stocks

1 Practically Perfect Canadian Stock Down 24% to Buy Now and Hold for Life!

CNR stock is a top Canadian stock for investors, especially with shares down on the TSX today.

Read more »

Canada national flag waving in wind on clear day
Dividend Stocks

The Best Canadian Stocks to Buy Right Away With $30,000

If you have $30,000 you're willing to invest, these are some of the first Canadian stocks to consider on your…

Read more »

rail train
Dividend Stocks

What to Know About Canadian Pacific Railway Stock for 2025

CP stock has now gone through a major merger, so what do investors have to look forward to?

Read more »