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.

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.

Technology

Image source: Getty Images

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%. 

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

Blocks conceptualizing Canada's Tax Free Savings Account
Dividend Stocks

How I’d Structure My $14,000 TFSA for Constant Income

If you have $14,000 saved in your TFSA, here is one easy investment strategy to earn $50 of tax-free monthly…

Read more »

woman looks at iPhone
Dividend Stocks

I’m Not Selling Telus After the 55% Dividend Cut: Here’s Why

Contrary to what the market seems to be saying, Telus Corporation (TSX: T) still has a lot going for it.…

Read more »

monthly calendar with clock
Dividend Stocks

A No-Nonsense 3.7% Dividend Stock That Can Pay Retirees Monthly

This no-nonsense dividend stock has returned more than $3.4 billion to shareholders through dividends since 2013.

Read more »

dreaming of financial success
Dividend Stocks

3 Questions to Ask Before Buying a Dividend Stock

Buying a dividend stock? Here are three questions to help you look beyond the yield, with examples from Enbridge, Fortis…

Read more »

Woman in private jet airplane
Dividend Stocks

Make $100 a Month Tax-Free: How Much to Invest in Diversified Royalty and Where

The TFSA is the ultimate investment account to place your money and earn tax-free income.

Read more »

man in bowtie poses with abacus
Dividend Stocks

Passive Income From Dividends: What Canadians Can Realistically Expect

Here's the actual dividend math the passive income gurus won't show you.

Read more »

Blocks conceptualizing Canada's Tax Free Savings Account
Dividend Stocks

RRSP, TFSA or Both? A Quick Guide by Income Level

Your RRSP and TFSA are complementing accounts that you can use to shield your income from taxes.

Read more »

Real estate investment concept with person pointing on growth graph and coin stacking to get profit from property
Dividend Stocks

Buying Your First Home? The $8,000 FHSA Deduction Most Renters Miss

An eligible renter's $8,000 FHSA contribution can save $2,400 at a 30% tax rate, with the purchase date guiding investments.

Read more »