It’s a good way for new stock investors to start with simple dividend stocks. Dividend stocks are easier to understand. Periodically, most commonly, every quarter, these stocks pay out a cash distribution that serves as a consistent return.
For example, if you invest $1,000 in a dividend stock that yields 4%, you’ll receive $40 a year. The Canadian Dividend Aristocrats are dividend stocks that tend to increase their dividends every year.
It’s not unheard of for long-term investors in these Canadian Dividend Aristocrats to have yields of more than 10% after holding the dividend stocks for a number of years.
The long-term average market returns are 10%. Therefore, as soon as you start getting a yield on cost of over 10% from a sustainable dividend stock, you’re set up to beat the market in long-term returns!
A high initial yield or high dividend growth can help lead to a yield on cost of +10% sooner.
Dividend stocks that could beat the market
Here are examples of Canadian Dividend Aristocrats that could beat the market in the long run.
Let’s say investor John bought global Brookfield Infrastructure Partners L.P. (TSX:BIP.UN)(NYSE:BIP) in 2013 for an initial yield of 5.1% on the TSX. He would be sitting on a yield on cost of more than 12% today thanks to the utility having increased its cash distribution at an average annual rate of about 9.5% (in U.S. dollars). In the same period, the TSX stock delivered total returns of about 18% per year.
BIP stock aims to continue increasing its cash distribution sustainably by 5-9% a year with a payout ratio of 60-70%. If John initially invested $1,000 in BIP stock, he would be generating more than $120 of passive dividend income every year from now on.
Enghouse Systems (TSX:ENGH) is a growth stock that uses an M&A strategy. Although its yield is small, it averaged an earnings-per-share growth rate of more than 24% in the past five years and has been growing its dividend at a high rate. Investors in the stock can potentially grow their income at an above-average rate.
Assuming John bought the tech stock in 2012 for an initial yield of 2.6%, he would be sitting on a yield on cost of about 13% today thanks to ENGH’s dividend growth rate of about 19% from 2012 to 2021. In the same period, the dividend stock’s annualized returns were 27%.
Enghouse’s dividend is sustainable with a payout ratio of about 40%. So, John would be generating more than $130 per year of passive income from ENGH stock going forward.
The Canadian Dividend Aristocrat has experienced a meaningful correction of about 24% from its all-time high last year. A rebound of growth, likely from M&A activities, could trigger a nice rally in the stock down the road.
The Foolish investor takeaway
By buying dividend stocks that generate persistently growing earnings or cash flow on a per-share basis in the long run, investors will sooner or later achieve a high yield on cost that beats the market returns no matter if it’s a bull or bear market. That’s because dividend payments don’t rely on market sentiment as price appreciation does. Dividend payments rely on stable earnings or cash flow and sustainable payout ratios.
New investors can begin their research on Canadian Dividend Aristocrats that tend to increase their payouts annually.
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.
The Motley Fool owns shares of and recommends Enghouse Systems Ltd. The Motley Fool recommends BROOKFIELD INFRA PARTNERS LP UNITS and Brookfield Infrastructure Partners. Fool contributor Kay Ng owns shares of Brookfield Infrastructure and Enghouse Systems.