Dividend investors looking for passive income have plenty of choices in Canada. In fact, some of Canada’s largest stocks have long histories of paying and growing their dividends. Now, given some of the recent economic challenges brought on by high interest rates, Canadian passive-income investors do need to be cautious.
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If you want long-term, passive income, look at more than a big dividend yield
High interest rates can be a headwind against many dividend stocks that use debt to magnify cash returns. Already we have seen several high-yielding dividend stocks (like Algonquin, Corus, and True North REIT) lower their dividend to protect their balance sheets. Hence, it is crucial for Canadians to be very choosey about picking quality dividend stocks.
In many cases, it is better to choose a stock with smaller dividend yield that is growing sustainably. If you can find a stock with a durable business, a solid balance sheet, and room to keep growing earnings, you are much more likely to safely earn and grow your passive income over years and decades. Here are two top stocks to consider owning for decades of passive income.
CN Rail: A century of growth and perhaps more ahead
Canadian National Railway (TSX:CNR) has been in operation for over 100 years. It has been paying a dividend ever since 1997. It doesn’t pay a large dividend yield at 2%. Yet over the past 20 years, it has raised its dividend by a 16% compounded annual growth rate.
Rail is still the most efficient and affordable way to transport bulk goods around North America. It is likely to stay that way for many years ahead. CN’s infrastructure is impossible to replicate, so that creates a very strong competitive moat and great pricing power.
CN has a 39% earnings payout ratio. This suggests that its dividend is very sustainable. Its balance sheet is in strong shape and is protected by generally strong free cash flow generation.
Even though CN’s 2023 outlook was weaker than the market expected, its long-term outlook for passive-income growth and capital upside remains very positive.
Fortis: Almost 50 years of passive-income growth
For dividend sustainability and longevity, Fortis (TSX:FTS) is probably one of the best passive-income stocks in Canada. Fortis has consecutively grown its dividend for 49 years. While it hasn’t grown its dividend at the same rate as CN, it has compounded annually by 7.9% over the past 20 years.
Like CN, Fortis has a very defensive business. It operates 10 utilities across North America. In its markets, it is the core regulated utility operator, which means it doesn’t suffer from much competition. Its services are essential, and it is allowed to earn an appropriate return on most of its investments.
Fortis pays a 4% dividend yield today. Right now, its payout ratio sits at around 80%, which is a little high. The company recognizes this. As a result, it has chosen to maintain a strong balance sheet and grow its dividend by a more moderate 4-6% annually. While this is conservative, it certainly protects the longevity of the business and its passive income.
