Looking for a Steady Income in Retirement? These TSX Stocks Can Help

Here are top-quality, dividend-paying TSX stocks.

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How wonderful would it be if the passive income took care of all of our expenses? This kind of financial independence is totally possible if you start investing early in your career. Some TSX stocks provide enormous stability and dividends that will be very apt for your sunset years.

Stable passive income and TSX stocks

If your investment objective is stability, you should likely overlook growth. This significantly reduces the risk in the portfolio. For example, the top utility stock, Canadian Utilities (TSX:CU) is a safe dividend-paying, less-volatile stock. It pays a stable yield of 4.6%, fairly higher than TSX stocks. It offers reliable dividends and has raised shareholder payouts for the last 50 years. That indicates its immense earnings stability and balance sheet strength.

Fast-growing companies invest their residual cash flows in high-returning projects. So, they don’t have surplus cash to pay to shareholders. However, mature companies like utilities have no new projects to try out and make higher returns. They have large, regulated operations that make a predefined return on capital. Plus, stable demand for their operations facilitates earnings visibility and, thus, dividend stability.

As a result, CU stock has notably underperformed TSX growth stocks. But when the aim is to seek stable passive income, CU is one of the top defensive bets.

Earnings stability and balance sheet strength

It is not prudent to invest only in defensive or in growth stocks. There should be an optimum asset allocation based on the risk appetite. An investor early in their career can choose to invest a large chunk in growth stocks due to their relatively higher risk appetite. As they get closer to retirement, they can increase exposure to defensive stocks by trimming growth stocks.

When investing for a stable passive income, it would be imprudent to consider stocks based only on the absolute dividend amount. Dividend yield should be the focus, as it considers the stock price with regard to the payment.

Extremely higher dividend yields should also be seen with caution, as they could be higher due to the stock price fall. For example, TSX utility stocks offer an average dividend yield of 4%. However, Algonquin Power (TSX:AQN) offered around 10% yield late last year. This abnormal yield was only due to the steep stock price fall. It moderated later when the company trimmed its dividends in early 2023.

Another handsome name for dividend investors could be Canadian Natural Resources (TSX:CNQ). Though it belongs to the risky energy sector, it checks all the boxes of stable earnings and dividend growth along with a superior balance sheet. It currently yields 5%, which is in line with the peer energy bigwigs.

It has increased shareholder payouts for the last 23 consecutive years, indicating dividend reliability. CNQ will likely keep growing its dividends thanks to its stable earnings. It will not be a defensive bet as utility stocks discussed above, given its fundamentally higher volatility. However, it offers handsome total return prospects, considering the above-average risk.

Bottom line

Suppose you built a reserve of $500,000 during your working years by investing in growth stocks. If you invest this $500,000 equally in the above two 5%-yielding stocks, they will generate $25,000 annually in dividends. If the initial investment looks a tad burdensome, one can consider raising the investment period. There are many high-quality TSX stocks that offer regularly growing dividends for years. The more clarity you have about your retirement goals, the closer you’ll get to your financial freedom.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool recommends Canadian Natural Resources. The Motley Fool has a disclosure policy. Fool contributor Vineet Kulkarni has no position in any of the stocks mentioned.

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