SPY is the U.S. ticker for the exchange traded fund (ETF) that seeks to track the performance of the S&P 500 Index, which is a benchmark for the U.S. stock market. Normally, it would make more sense to compare Canadian stocks to the Canadian stock market as a benchmark. However, the U.S. stock market, using SPY as proxy, has typically outperformed the Canadian stock market in the long run. So, Canadian investors would be smart to look for stocks that could beat SPY instead of the Canadian stock market. Here is a Canadian dividend stock that could outperform SPY in the coming years.
SPY and BN Total Return Level data by YCharts
Right off the bat, we can observe from the chart that Brookfield Corp. (TSX:BN) is somewhat correlated to the benchmark, but it is more cyclical than the U.S. market. For example, it had corrected more severely from the end of 2021 partly because it previously had a stronger run. Therefore, we can project that Brookfield stock could again provide greater price appreciation in a rising market.
SPY’s yield is approximately 1.5%, while Brookfield stock’s dividend yield is about 0.8%. So, the U.S. stock market benchmark provides almost double Brookfield stock’s income. As shown in the graph, in the last 10 years, the SPY ETF has transformed an initial investment of US$10,000 into about US$31,660, which equates to total returns of approximately 12.2% per year. For better comparison, the chart uses the NYSE:BN ticker, which indicates total returns of about 11.6% in the period (for reference, TSX:BN delivered returns of 14.5% in the period.)
Some investors like the diversification provided by ETFs. Interestingly, Brookfield is quite diversified. It’s focused on compounding capital over the long run with a target to achieve annualized returns of over 15% for its shareholders. Its capital is deployed across its asset management, insurance solutions, and operating businesses.
A growing dividend
Brookfield reported solid second-quarter results yesterday. Its asset management business enjoyed a strong quarter of fundraising and deployment, increasing its fee-related earnings by 16% year over year, excluding performance fees. Likely thanks to higher interest rates, its insurance solutions business was able to increase investment returns on existing assets by redeploying its short-duration portfolio into higher-yielding assets. Its operating businesses, across its renewable power and transition, infrastructure, private equity, and real estate businesses, continued to generate high-quality cash flows that were predominantly stable and recurring.
Year to date, it announced over US$50 billion of acquisitions, sold about US$15 billion of assets, and is on track to hit a record of about US$150 billion of inflows this year. In the last 12 months, distributable earnings before realizations increased by 11% year over year to US$4.3 billion. The per-share growth was 22% to US$2.56. Distributable earnings growth was 6% to US$5.2 billion, while the per-share growth was 7.6% to $3.26.
Although Brookfield has a small yield, it could create more wealth for shareholders than SPY in the long run. According to the rule of 72, based on a return of 15%, it could potentially double investors’ money within five years.
At US$34.55 per share, the analyst 12-month consensus price target represents a meaningful discount of 26%. Brookfield stock seems like a wonderful long-term investment at the recent price, but investors should invest in other potential winners to build up a diversified portfolio.
