When you are looking to buy dividend stocks, it is crucial to complete a thorough due diligence process. Just because a stock has a high-yielding dividend doesn’t mean it will be a good investment in the long term. In fact, dividend yields over 8% can be a warning sign that either a dividend rate is not sustainable or a business has some serious headwinds.
I find the smartest thing to do is look for stocks that have sustainable and growing dividends. It is crucial to understand that the business has a strong balance sheet, a competitive advantage, great products/services, smart managers, and sustainable cash flows that can not only support its dividend, but also regularly increase it. If you are looking for some smart dividend stocks, here are three to consider buying with $400 right now.
TD Bank: A top Canadian blue-chip stock
Toronto-Dominion Bank (TSX:TD) is a quintessential blue-chip dividend stock in Canada. The company has a massive network of branches across Canada and the eastern United States. TD is very well managed, and it has one of the best capital ratios among peers in North America.
While a recession could pose a risk to its loan book, the bank does get the benefit of higher earnings from higher interest margins. If interest rates hold and the economy remains stable, it could continue to deliver solid results.
It has grown earnings per share by a compound annual growth rate (CAGR) of 10.8% over the past 10 years. At the same time, it has grown its annual dividend rate by a 9.4% CAGR. In fact, it has increased its dividend almost every year since 1995. Today, it pays a 4.2% dividend yield. Its price-to-earnings ratio of 9.5 looks like a reasonable price to pay for this quality stock.
Brookfield Infrastructure Partners: A diversified infrastructure play
If you are looking for a diversified book of essential assets, Brookfield Infrastructure Partners (TSX:BIP.UN) is a great dividend stock. It owns everything from railroads to ports to LNG export terminals to cell towers.
Most of these assets has long-term contracts or are regulated. Cash flows are relatively predictable and foreseeable. Likewise, many of its contracts have inflation-linked earnings. As a result, this stock is very defensive, even in an inflationary environment.
Brookfield has a lot of debt, but it is long-dated and largely fixed. The company just increased its dividend 6%. It has grown its dividend rate every year since 2009. Today, you can buy this stock with an attractive 4.4% dividend yield.
Fortis: A stock for dividend consistency
If you want a very conservative stock for dividends, then Fortis (TSX:FTS) has to be on your list. It operates 10 regulated transmission utilities across North America. Fortis is the model of consistency. If it increases its dividend this year, it will mark 50 years of consecutive dividend increases. It will join only an elite few “Dividend Kings” in Canada.
Given how essential heating/cooling and electricity are in our modern existence, Fortis tends to earn predictable earnings. Likewise, it is investing in a very tangible capital plan that plans to provide mid-single-digit annual growth for the coming five years.
This stock doesn’t have a tonne of upside, but it can provide a steady balance of growth and income. For the longevity of a dividend, this is one of the best stocks in Canada.
