Hi, new investors. By investing in stocks, you’re targeting to generate high returns versus other asset classes, like bonds. By taking higher risk, you expect higher returns. However, in the stock market, there’s a spectrum of risk. Stocks that pay regular dividends are low risk, and they can still deliver solid returns, especially if you reduce valuation risk by buying them at reasonable valuations.
Here are a few low-risk Canadian dividend stocks that every Canadian should consider.
RBC stock
Big Canadian banks are some of the most profitable businesses on the TSX that pay regular dividends. So, it would be a good idea for new investors to own some shares.
In particular, Royal Bank of Canada (TSX: RY)(NYSE: RY) has paid dividends for over 150 years. It has leading positions in the key product categories across Canadian banking. Its diversified business in personal and commercial banking, wealth management, capital markets, and insurance allows it to make profits through economic cycles with little uncertainty. Surely, economic downturns can hinder its profits in the short term, but in the long run, it makes good money for investors.
The company is well managed. Management has three- to five-year targets of
- A diluted earnings-per-share (EPS) growth rate of more than 7%;
- A return on equity (ROE) of over 16%; and
- A dividend payout ratio of 40-50%.
In the past three and five years, RBC has exceeded these targets by delivering EPS growth rates of 10% and ROEs of 16.5% and 16.8%, respectively, and it’s kept its payout ratio at or below 47%.
At $126.47 per share at writing, the dividend stock is discounted by about 10% and offers a safe yield of just over 4%. Assuming no valuation expansion, it can deliver long-term returns of about 11%. Valuation expansion that eliminates the discount would increase its five-year annualized return to approximately 12%.
BCE stock
The big Canadian telecom stocks are also popular for dividends. BCE (TSX: BCE)(NYSE: BCE) offers the largest dividend yielding close to 5.8%. It also generates the most massive revenue — more than $23 billion a year.
Like RBC stock, BCE has paid dividends for over a century. Specifically, it has increased its dividends every year for about 13 years with a 10-year dividend-growth rate (DGR) of 5.5%.
The dividend stock generates stable annual operating cash flow of close to $8 billion as a good proportion of its revenue is recurring.
The dividend stock is fairly valued. Therefore, the juicy dividend yield combined with its dividend growth can lead to long-term returns of about 10-11% per year.
Fortis stock
Utility stock Fortis (TSX: FTS)(NYSE: FTS) also generates stable earnings and cash flows. Its assets are primarily for distributing and transmitting gas and electricity, which makes it an essential business through economic cycles.
Sure enough, the dividend stock has paid increasing dividends for close to half a century! Its 10-year DGR is 5.9%. Management targets a dividend compounding at about 6% per year through 2025. It has a capital plan that drives low-risk rate base growth to support this dividend-growth objective.
At $59.67 per share, the stock is fairly valued. It pays a safe yield of close to 3.6%. Combined with a DGR of about 6%, the dividend stock can deliver total returns of close to 10% in the medium term.
