Many investors dream of the day they are able to leave their day jobs and live off passive-income sources. However, it can be difficult for investors to determine which stocks they should add to their portfolio to build this reliable source of income. Dividend companies may be hard to judge, as there are many factors that go into reliable dividend distributions. In this article, I will discuss two companies that should find a home in your dividend portfolio.
A leader in the Canadian rail industry
When it comes to railway stocks, there are two companies that come to mind: Canadian National Railway and Canadian Pacific Railway (TSX: CP)(NYSE: CP). Of these two, both present very solid investments. However, given the choice, I would go with the latter. I believe Canadian Pacific’s dividend is more attractive and that the company has more upside in terms of growth moving forward.
Looking at Canadian Pacific’s dividend, 2020 marks the fifth consecutive year of increased dividend distributions by the company. This means that Canadian Pacific Railway should be added to the Canadian Dividend All-Stars list next year. Although Canadian National Railway has firmly remained on this list for more than two decades (24 years of consecutive dividend growth), I think Canadian Pacific is better positioned in the coming years.
Currently, Canadian Pacific offers a dividend with a forward yield of 0.90%. Although this is on the lower side, so is the company’s payout ratio (20.40%). Generally, I look for companies that have a payout ratio of 60% or lower, as it shows that the company has room to grow its distributions in the future. With a payout ratio well below 60%, I have little doubt that Canadian Pacific will fail to do so in the coming years.
In addition, company has reported 1-year, 3-year, and 5-year dividend growth rates of 14.63%, 18.92%, and 13.52%, respectively. When evaluating dividend companies, I rank those that can consistently raise distributions by 10% or higher above those that fail to do so. As it stands, Canadian Pacific’s dividend growth is slightly more impressive than that of Canadian National, resulting in its placement in this article.
The growing renewable energy industry has attractive dividend companies
One industry that I really like is the renewable energy industry. I believe these companies have incredible growth opportunities ahead of them, and that gas-oriented companies will need to re-structure their operations in order to remain relevant in future years. Within this industry, I am particularly interested in Algonquin Power & Utilities (TSX: AQN)(NYSE: AQN) and Brookfield Renewable Partners. I believe both have their merits, but in this article, I will focus on the former.
Algonquin Power is a leading renewable energy and utility company in North America. Through its subsidiary, Liberty Power, the company operates a diversified portfolio of 35 assets. These include wind, solar, hydroelectric, and thermal facilities.
Algonquin Power has been able to grow its dividend each year since 2010. This indicates that the company’s management has been able to allocate capital intelligently for about a decade. In fact, over that period, Algonquin Power’s dividend has consistently increased at about a 10% growth rate. As mentioned previously, this is exactly what I look for in reliable dividend companies.
Currently, Algonquin Power has a forward dividend yield of 3.97%. The company does, however, have a higher payout ratio than I would like (72.22%). One reason I believe this company remains a great dividend option for investors, regardless of a high payout ratio, is its solid history of dividend distributions.
Foolish takeaway
Living off passive-income sources is a goal of many investors. By including companies such as Canadian Pacific Railway and Algonquin Power in your portfolio, investors are putting themselves in a position to do that.
