High-dividend stocks might be appealing for retirement. However, dividend-growth stocks might be a better alternative. High-dividend stocks can be attractive for immediate passive-income returns. Yet they can also be fraught with issues.
Take dividend-growth stocks over those with high yields
Stocks with elevated dividends often must pay a significant amount of their cash flow in dividends. In some cases, they must constantly issue debt and equity financings to sustain their operations and dividends. With interest rates significantly higher than just a year ago, these financings are much more challenging.
As a result, these companies have limited excess capital to grow or maintain their business when times get tough. As we have already seen, an elevated dividend can often mean elevated business risk.
On the contrary, dividend-growth stocks must grow cash flows and earnings to pay their dividends. The best companies try to sustainably grow their dividend while also predictably growing their businesses (and profits). If you like this approach, here are three dividend stocks for fast-growing passive income.
A cheap financial stock with significant growth ahead
goeasy (TSX:GSY) is not just a dividend stock. It is also a growth stock. Over the past decade, it has increased its earnings per share by over 1,200%! That equates to a 29% compound annual growth rate (CAGR). Its stock has delivered attractive returns in that time. It is up 842%!
goeasy is one of Canada’s largest non-prime consumer lenders. Today, it has over 400 locations across Canada. The company has grown by expanding in a space the big banks have largely neglected.
The stock yields a 3% dividend right now. The company has increased its dividend for nine years. Its dividend has grown by a 26% CAGR over that period.
Despite a weakening economy, the company has continued to gain traction with higher-quality loans and a diversified lending offering. Overall, this company still has legs to run. It doesn’t hurt that it only trades for 8.5 times earnings.
An energy stock known for its consistency
One of the best dividend stocks in Canada is Canadian Natural Resources (TSX:CNQ). Unfortunately, many investors don’t give Canadian Natural its fair regard because it operates in a cyclical industry. Even though the energy sector is cyclical, CNQ has the financial and operational know-how to deliver consistent, growing total returns for shareholders.
The company has decades of reserves that it can produce at very little incremental cost. By mid-2024, the company should hit its debt targets. After which, it plans to return 100% of free cash flows back to shareholders.
It has already grown its dividend by a +20% CAGR for over 20 years. That doesn’t include the $1.50 per share special dividend it paid last year. If it hits the above targets, substantial share buybacks, dividend increases, and special dividends could be on the way.
An asset management stock for dividend income
Brookfield Asset Management (TSX:BAM) is another intriguing stock for dividends and growth. BAM was spun-out of Brookfield Corporation last year. It is the asset-light manager of Brookfield’s private and public entities and investments.
It manages a wide array of funds and investment strategies for large institutions and pension funds. In return, it collects a steadily growing stream of fees and carried interest, as it grows assets under management.
The company has a clean, debt-free balance sheet and plans to pay out 90% of its earnings in distributions to shareholders. If it can keep growing its investment offerings, shareholders are likely to benefit from strong dividend growth. This stock yields a 3.8% dividend today.