Many people look to high-yielding dividend stocks for passive income. Certainly, this can seem easy and convenient. Who doesn’t want to earn an outsized dividend yield on their investment? It’s a tangible cash return!
Take total returns over high dividend yields
Unfortunately, there are two problems with this. Firstly, if you are not holding your dividend stocks in a registered account (like the Tax-Free Savings Account, or TFSA, or Registered Retirement Savings Plan, or RRSP), you are paying tax on every dividend payment. Over time, that can eat away your long-term returns.
Secondly, stocks with elevated dividends (like over 7-8%) tend to have elevated risks associated with their business. This can be due to macroeconomic concerns, balance sheet troubles (rising interest rate exposure), a weakening competitive edge, or declining sales/earnings.
Passive income for decades
Any time you are buying a stock with an outsized yield, it is crucial to make sure you are confident in its sustainability and longevity. If you want to own a stock for decades, it is better to buy a stock that grows earnings/cash flows and dividends hand in hand.
Three stocks that should safely provide decades of sustainable dividends are Granite Real Estate Investment Trust (TSX:GRT.UN), Canadian National Railway (TSX:CNR), and Brookfield Asset Management (TSX:BAM).
Granite REIT: A real estate stock for the decades
With a market cap of $5.4 billion, Granite REIT is Canada’s largest industrial REIT. It has a portfolio of 128 buildings in Canada, Europe, and the United States. It also has 12 properties in development. If you are not familiar, industrial properties have been one of the strongest real estate asset classes.
Factors like near shoring, rising e-commerce, and limited supply have drastically pushed up occupancy and rental rates. Right now, Granite has 99.6% occupancy, and an average lease term of 6.7 years. Even without acquiring new properties, this REIT expects to grow by the high single digits in 2023.
Today, Granite stock earns a 3.8% distribution yield. This passive-income stock has increased its distribution for 12 consecutive years. Its distribution-payout ratio at 65% keeps the distribution growth very sustainable here.
CN Rail: Assets you can’t replace
Canadian National Railway stock has beaten the market for nearly three decades. Over the past 10 years, its stock has delivered 13.9% average annual return. With a 1.9% dividend yield, its passive-income stream might seem underwhelming. Yet it has grown its dividend annually by a low-teens rate for years.
CN Rail is an essential business to the North American economy. There is no other affordable alternative to transport bulk goods and commodities across the continent.
As a result, this company holds a very strong competitive edge. It has a new management team looking to maximize its efficiency and profitability. If successful, this stock will keep growing its dividend for many years ahead.
Brookfield Asset Management: A long-term, passive-income stock
Brookfield Asset Management stock does not have the same type of long-term history, as the stocks above. It was only spun-out of Brookfield Corporation late last year. However, this company has been building out a leading-class alternative asset management business for a decade.
Brookfield Asset Management manages assets for both its parent and external investors. Yet it doesn’t hold any of these assets on its balance sheet, so it is a very clean investment. It just collects fees for its services, and most of those fees (and fee growth) are locked in for years.
This passive-income stock earns a 3.9% dividend yield. Given that it plans to distribute around 90% of its earnings, its dividend should also grow with its earnings over the coming years and decades.
