Top 2 TSX Dividend Stocks to Buy Under $50

When investing in dividend stocks, look at free cash flow, dividend history, and future cash flow. Here are two stocks to buy under $50.

| More on:

Image source: Getty Images

You must have heard a lot about dividends and how they generate passive income. But do you know how companies decide on dividends and pay them? In this article, I will take you behind the scenes and help you understand the company’s angle of dividend payment.

Why do companies pay dividends? 

A dividend is a cash distribution that the company pays from its surplus cash flow after setting aside capital expenditures and cash reserves. By sharing its profits, the management gives returns to its shareholders. The management decides on dividends. Hence, you will see some companies declaring bonus dividends when they have windfall gains. 

However, not all companies pay dividends. Only those that enjoy stable cash flows tend to give a percentage of it as a dividend payout. Their dividend growth is directly proportional to the change in cash flow. Why do such companies pay dividends?

If a company keeps hoarding cash, activist shareholders can force the management to distribute the excess cash as dividends. Benjamin Graham, the father of value investing, did the same in the Northern Pipeline affair. He obtained proxies for 37.5% of the company’s shares and forced the management to distribute spare cash. 

How to choose dividend stocks

When you look for dividend stocks, you should look at three things: 

  • Whether the company’s free cash flow (FCF) is stable or increasing.
  • Its dividend-payout ratio and dividend-paying history.
  • Its ability (business model and balance sheet) to maintain or grow its FCF in the future.

Considering the above points, here are two Canadian dividend stocks to buy under $50:  

Enbridge stock: 6.26% dividend yield

North America’s largest pipeline operator has a robust business model that generates increasing cash flow. It earns toll money on volumes of oil and natural gas transmitted through its pipeline. It increases toll money at regular intervals. When the company builds a new pipeline, it creates a new cash flow stream. It sets aside some cash to build and maintain pipelines and pays out 60-70% of distributable cash flow (DCF) as dividends. 

The business model has helped Enbridge successfully pay regular quarterly dividends for over three decades. It has even grown its dividend at a 10% average annual rate in the last 27 years

Enbridge’s DCF growth is slowing as it is becoming difficult to build new pipelines due to environmental concerns. But that will make its existing pipelines more valuable, and Enbridge can charge a higher toll. Moreover, the sector could see consolidation. This means Enbridge could continue paying incremental dividends for another decade or two. The stock is currently trading above $43 and has a dividend yield of 6.26%. 

SmartCentres REIT: 5.94% dividend yield

SmartCentres REIT has been paying stable monthly dividends since 2002. The retail REIT builds properties — some for sale and some to earn rent. It has the advantage of having Walmart as its tenant. Walmart accounts for around 25% of SmartCentres’s revenue. This is both good and bad. Walmart attracts more retail tenants, as its stores bring foot traffic. But too much concentration on one customer increases the risk if the customer decides to leave. You can only hope that day never comes. 

SmartCentres is trying to mitigate the risk by broadening its portfolio to include mixed-use properties like residential, offices, and storage facilities. SmartCentres has a dividend-payout ratio of 95%, which is a bit risky, as the management could cut dividends if it falls short of cash. But it has survived the 2009 Financial crisis and the 2020 pandemic without any dividend cuts. This shows the management’s determination to keep its shareholders happy while growing the business. 

SmartCentres could continue paying dividends for another decade, as Canada’s house prices rise and more people move to cities. The REIT is currently trading above $31 and has a dividend yield of 5.94%. 

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 Puja Tayal has no position in any of the stocks mentioned. The Motley Fool recommends Enbridge and Smart REIT.

More on Dividend Stocks

money cash dividends
Dividend Stocks

Want Passive Income: Hold This Canadian Dividend Growth Stock Forever

Passive income seeking investors can now buy shares of dividend-paying blue-chip companies at a discount, such as Brookfield Infrastructure.

Read more »

Senior Couple Walking With Pet Bulldog In Countryside
Dividend Stocks

Retirees: 2 On-Sale TSX Dividend Stocks to Buy Now for Passive Income

These top TSX dividend stocks now offer 6% yields.

Read more »

Payday ringed on a calendar
Dividend Stocks

New Investors: The 3 Best TSX Dividend Stocks for Monthly Cash

New investors looking for monthly dividend cash are in luck! Here are three attractive Canadian dividend stocks for growth and…

Read more »

A worker gives a business presentation.
Dividend Stocks

3 Dividend Stocks You Can Safely Hold for Decades

Here are three of the safest Canadian dividend stocks you can buy right now to hold for decades.

Read more »

Red siren flashing
Dividend Stocks

Buy Alert: This Energy Stock Is Unstoppable After Strong Results

Tourmaline Oil (TSX:TOU) beat earnings and looks unstoppable.

Read more »

Female hand holding piggy bank. Save money and financial investment
Dividend Stocks

2 Safe Dividend Stocks to Beat Inflation

Canadian investors, young and old alike, can cope with or even beat inflation by owning two safe dividend stocks.

Read more »

Dollar symbol and Canadian flag on keyboard
Dividend Stocks

2 Canadian Dividend Stocks (With +6% Yields) You’ll Regret Not Buying at These Prices

TSX dividend stocks such as TC Energy and TransAlta Renewable are well poised to deliver consistent returns to long-term investors.

Read more »

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Dividend Stocks

2 TSX Stocks With Market-Beating Potential

Even in the current economic environment, long-term investors have a great chance of beating the market. Stocks like CN Rail…

Read more »