Canadians seeking passive income can consider investing in dividend-growth stocks such as Brookfield Asset Management (TSX:BAM) and Exchange Income (TSX:EIF). These dividend stocks are trading at attractive valuations and are well positioned to keep growing their payouts in 2023 and beyond. Let’s see why.
Brookfield Asset Management stock
Brookfield Asset Management is among the largest and fastest-growing alternative asset managers globally. With US$825 billion in assets under management (AUM), BAM operates in 30 countries across five continents. Around US$432 billion of its AUM is fee bearing in nature, allowing it to pay investors an annual dividend of $1.70 per share, translating to a forward yield of 3.8%.
The company expects fee-related earnings to grow between 15% and 20% annually, which should support dividend raises in the future. Armed with a debt-free balance sheet, BAM has a payout ratio of 90%.
Its massive scale provides Brookfield Asset Management with a wide economic moat, enabling it to increase capital flows across business cycles. It is well poised to benefit from secular tailwinds across sectors such as renewables, infrastructure, real estate, private equity, and credit.
BAM has US$175 billion of discretionary capital, which can be invested across the Brookfield ecosystem, expanding its base of cash-generating assets.
Investors are also choosing to invest their capital base in alternative assets, allowing them to diversify their portfolio and lower overall risk. For instance, alternative assets will attract US$23 trillion in investments by 2026, up from just US$4 trillion in 2010.
Moreover, Brookfield Asset Management expects alternative assets to account for 60% of the portfolio for institutional investors, up from 30% in 2021 and just 5% in 2000.
Despite a sluggish macro environment, BAM raised US$98 billion in capital in the 12 months prior to the first quarter (Q1) of 2023. Further, it expects to more than double fee-bearing capital to US$973 billion by 2027. This should allow BAM to increase fee-based earnings to US$4.37 billion in 2027, up from US$2.16 billion in Q1 of 2023 and US$896 million in 2017.
Given these factors, investors can expect BAM’s dividends to surge over 100% in the next four years.
Exchange Income stock
A TSX stock with a forward yield of 4.9%, Exchange Income has already returned 277% to shareholders in the past 10 years after adjusting for dividends. Despite its outsized gains, EIF stock is priced at 14.5 times forward earnings, which is very cheap. Comparatively, Exchange Income is forecast to increase earnings by 11.5% annually in the next five years.
Exchange Income operates in verticals such as aviation, aerospace, and manufacturing. It invests in companies that are part of niche markets, allowing it to enjoy predictable cash flows. Since its initial public offering, Exchange Income has invested around $1.5 billion in acquisitions to expand its portfolio of services as well as enter new markets.
This business model has allowed the company to maintain dividends in the last 18 years. Its dividend payouts have increased from $68.5 million in 2018 to $97.5 million in 2022. Comparatively, its payout ratio has reduced from 60% to 55% in this period.
Analysts remain optimistic about EIF stock and expect it to surge over 30% in the next 12 months.
