Those familiar with my writing will know that I am a growth investor. As such, I try to invest in companies that offer the potential to double or more over the coming years. However, investing in only growth stocks could lead to a very volatile portfolio. In fact, half of the equation when it comes to beating the market is to avoid large pullbacks. With that said, adding dividend stocks could protect from major losses. Which three dividend stocks do I plan to buy?
A reliable compounder
While I don’t expect dividend stocks to produce outrageous returns, I do want to hold stocks that have a proven history of being reliable compounders. Over time, this compounding effect can lead to very generous returns. An example of such a company is Brookfield Asset Management (TSX:BAM.A)(NYSE:BAM). Since August 1995, this stock has returned nearly 4,200%, which represents an average annual gain of 15.5%. For comparison, the TSX has returned an average of 5.9% per year over the same period.
Brookfield Asset Management is an alternative asset management firm that invests in real assets. These are assets which have intrinsic value like real estate, infrastructure, and utilities. Those businesses may not be the most exciting. However, they are important in the continued function of society. Earlier this month, Brookfield announced that it would be partnering with Tesla to develop North America’s most sustainable neighbourhood. This could give the stock an extra boost if the project pans out.
Canada’s top bank
The Canadian banking industry is highly regulated. That makes it difficult for new competitors to enter the industry and displace the market leaders. Because of that, Canadians are often very comfortable investing in the Big Five. Of those, my top pick would be Bank of Nova Scotia (TSX:BNS)(NYSE:BNS). While its peers atop the Canadian banking industry have chosen to focus their efforts on growing in North America, Bank of Nova Scotia has decided to expand elsewhere.
The company has a growing presence in the Pacific Alliance, which is a region which includes the countries of Chile, Columbia, Mexico, and Peru. Although this exposes Bank of Nova Scotia to geopolitical risks, it also provides a strong opportunity for growth via a rapidly growing middle class in those countries. With a forward yield of 4.65%, Bank of Nova Scotia can be classified as a high-yield dividend stock with tons of growth potential.
One of the best dividend-paying companies in Canada
When looking at dividend stocks, the most important metric is likely a company’s dividend-growth streak. This tells investors how many years in a row the company has been able to increase its dividend. Companies that are able to do so for five years or more are added onto the Canadian Dividend Aristocrat list. Fortis (TSX:FTS)(NYSE:FTS) is notable for holding the second longest active dividend-growth streak in Canada. As of this writing, Fortis has been able to increase its dividend in each of the past 47 years.
This company’s dividend-growth streak becomes very impressive when you consider all the economic downturns that have occurred over the past five decades. Although the company’s dividend-payout ratio is a bit higher than many investors would like (73%), Fortis has shown the ability to allocate capital intelligently over many decades. The stock is also one of the least volatile on the TSX, with a beta of 0.06. This is an excellent company to consider for downside protection.
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 Jed Lloren owns shares of Tesla. The Motley Fool owns shares of and recommends Brookfield Asset Management and Tesla. The Motley Fool recommends BANK OF NOVA SCOTIA, Brookfield Asset Management Inc. CL.A LV, and FORTIS INC.