Whenever we talk about passive income, banks, energy, and real estate companies come to mind. A hidden gem among the dividend stalwarts is a stock that gives you a stable quarterly payout, Power Corporation of Canada (TSX: POW) – don’t mistake it for an energy company. POW is a financial services holding company. Despite being severely hit in the 2008 financial crisis, POW maintained its dividend per share at $1.16 between 2008 and 2014.
POW resumed dividend growth in 2015 and has been growing them at an average annual rate of 7%. If the dividend growth is uneven, why do I still call it a magnificent stock?
A magnificent stock with a 5.9% yield
Power Corporation of Canada holds three publicly traded companies (81.4% of its asset value) and two private companies (7.4% of asset value). Like mutual funds or asset management companies, POW reports its asset value and earns from dividends and capital appreciation of its assets. In other words, POW is as strong as its holding companies.
Power Corporation of Canada’s holdings
Great-West Lifeco (TSX: GWO) accounts for 57.5% of POW’s asset portfolio. Great-West is an insurance holding company with names like Canada Life, Irish Life, and Empower as wholly owned subsidiaries. It also has a significant stake in Putnam Investments and Prudential. Through its holdings, Great-West offers life and health insurance and retirement products to Canada (39%), the United States (25%), and Europe (30%).
Great West is a dividend stock with a five-year average dividend payout ratio of 55.6%. However, the company saw earnings weakness due to tepid investment returns, which increased its first-quarter payout ratio to 81.3%. Its two major markets – the United States and Europe – face economic weakness, directly impacting its earnings. So far, GWO has continued to grow its dividend. But if the company’s financials get strained, it might pause dividend growth.
IGM Financial (TSX: IGM) has IG Wealth Management and Mackenzie Investments under its portfolio. Like Great West, its key markets are Canada, the United States, and Europe. The weak equity performance impacted IGM’s 2022 earnings. But it has enough flexibility to take more hits on its earnings without impacting its dividend per share.
POW depends on the above two subsidiaries for dividends. It depends on alternate asset management (real estate) for capital appreciation.
The bull case for this magnificent stock
Power Corporation of Canada has diversified across the asset classes of life insurance, wealth management, private equity, and real estate. Its contrarian investments reduce the downside in a weak economy and increase the upside in a growing economy.
During the stock market bull from April 2020 to October 2021, the POW share price doubled (100%), outperforming the TSX Composite Index (71%). However, the POW share price has fallen 15% since the tech bubble burst in November 2021, underperforming the TSX Composite Index (down 10%). The drop is because POW has significant exposure in the United States and Europe.
The stock could see a significant pullback if the U.S. economy plunges into a recession. That would be a good time to buy this stock. Because, unlike U.S .banks, POW’s portfolio is not concentrated in long-term bonds. A diversified asset base will help POW sustain its dividend as it did in the 2008 crisis.
If you had invested $10,000 during the January 2009 bottom, you would have purchased 512 shares of POW and secured $1,075 in annual dividends plus $8,222 in capital appreciation today. Adding up all returns from 14 years, your $10,000 would be $39,400, giving an average annual return of 10%.
Final thoughts
POW might see some bearish momentum in the short term. So you can buy some shares of POW every month to reduce your cost per share and enhance your dividend yield. The stock is currently down 14.8% from its bubble peak and has a 5.9% dividend yield. Now is a good time to start buying POW shares with a $100–$300 monthly investment and lock in a 10% average annual return.
