Investing money isn’t always a hassle. If you prefer to buy some stocks and hold them for a long time, you can invest in Dividend Aristocrats. These stocks will not only give you a regular annual payout but will also increase it annually while keeping your principal investment secure. You can either collect the payout or reinvest the dividend to compound the returns and enjoy a bigger portfolio after a few years.
If you are looking for stable growth, dividend reinvestment can help you compound your portfolio returns. If you reinvest dividends, you can buy more shares. By increasing the share count, you can grow your dividend payment, as companies pay dividends on a per-share basis.
BCE stock
Canada’s telecom giant BCE (TSX:BCE) has been growing dividends for 15 straight years. It grew dividends even before that but paused the growth for a few years after the 2008 financial crisis. When it comes to compounding returns, I prefer BCE, as this stock has maintained its dividend-reinvestment plan (DRIP) since 2012, while many pipeline companies suspended their DRIP.
How does a DRIP work?
BCE declares a quarterly dividend. If you opt for the DRIP, instead of paying you a dividend, BCE will add more shares to your account at the market price. DRIP helps you save on broker commission, but dividend income is taxed. If you invest in BCE through Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP), they allow your investments to grow tax free, saving you dividend tax.
How dividend stocks can earn you long-term growth
BCE stock has been hovering between the $58 and $66 price range for the last five years. For ease of calculation, I took an average stock price of $62. But if you time your purchases such that you buy BCE stocks only when the stock trades at or below $60, you can enhance your returns.
| Year | Average BCE Stock Price | Annual Investment | BCE Shares Purchased | Total Share Count | BCE Dividend per share (5% CAGR) | Total dividend |
| 2023 | $62.00 | $4,000.00 | 64.52 | $3.87 | $249.68 | |
| 2024 | $62.00 | $4,000.00 | 68.54 | 133.06 | $4.06 | $540.69 |
| 2025 | $62.00 | $4,000.00 | 73.24 | 206.30 | $4.27 | $880.20 |
| 2026 | $62.00 | $4,000.00 | 78.71 | 285.01 | $4.48 | $1,276.84 |
| 2027 | $62.00 | $4,000.00 | 85.11 | 370.12 | $4.70 | $1,741.05 |
A $4,000 annual investment in BCE will buy you 64 shares at $62 per share. BCE grows its dividend at an average annual rate of 5%. The current fundamentals suggest that the telecom giant can maintain this growth for some time. BCE’s dividend per share is $3.87 for 2023. Your 62 shares will earn you $249 in annual dividends ($61.92 per quarter). BCE will buy your four shares in a year through DRIP. Next year, you buy 64 more shares plus four DRIP shares, bringing your total share count to 132. If BCE increases its dividend by 5% to $4.06, your 132 shares will earn you $536 (132 shares x $4.06) in dividend, which would otherwise be $520 without the DRIP.
Four shares of $16 might look small, but when compounded for five years, they become significant. A $4,000/year investment for five years would buy you 320 shares without DRIP and 368 with DRIP. The 48 DRIP shares can earn you $225.6 in annual dividends.
At the end of the fifth year, your $20,000 investment is worth $24,545 ($22,813.8 in shares + $1,731 in annual dividend).
Canadian Utilities
Like BCE, Canadian Utilities (TSX:CU) is a long-term dividend payer, growing its dividend for 51 straight years. Note that the utility suspended its DRIP from January 2019 to January 2022, as dividends are subject to management’s discretion. If the business environment is weak or the company is expanding, the management will prioritize business investment and sustaining dividends over DRIP.
Canadian Utilities stock hovers in the range of $30-$40. As a utility company, its stock price has a seasonality effect. Instead of investing a small monthly amount, you can invest $4,000 in one go when the stock trades below $35 and lock in over 5% yield.
