Both dividend stocks and guaranteed investment certificates (GICs) can be good sources of income. As the Bank of Canada has meaningfully increased the policy interest rate since 2022, Canadians can earn an interest rate of up to about 5.75% on traditional one-year GICs. Certain dividend stocks also offer decent dividend yields for investors who seek current income.
Since the Canadian stock market currently offers a cash distribution yield of approximately 3.3%, Canadian investors could explore safe dividend yields of, say, 4.95% to 6.6% (or 1.5 to 2 times that of the stock market yield) from dividend stocks.
How do you choose between dividend stocks and GICs? Since traditional GICs provide principal guarantee, they are lower risk investments. They are suited for capital that you want to take no risk in. For example, if you plan to buy a car a year later, you can park the savings meant for the car purchase in a one-year GIC. For long-term capital that you don’t need for at least the next three to five years, you can consider investing in higher-risk investments like dividend stocks to potentially get a higher return.
Here are some dividend stocks with dividend yields of about 5% and 6.6% as possibilities for long-term investment planning.
Bank of Montreal stock
Bank of Montreal (TSX:BMO) stock has corrected more than 21% from its peak in 2022. At $111.64 per share, BMO trades at a good valuation that’s about 9.3 times adjusted earnings. In the past 10 fiscal years, the bank stocked delivered adjusted earnings-per-share growth at a compound annual growth rate of about 8.2%. So, chances are, the Canadian bank stock is undervalued for a long-term investment. Its long-term price-to-earnings ratio is closer to 11 times, which suggests a discount of about 15%.
The bank has a strong track record of dividend payments, having paid dividends every year since 1829. Its payout ratio is estimated to be sustainable at about 49% of adjusted earnings this year. For your reference, its five-year dividend growth rate is 8.9%. BMO can continue with healthy dividend increases over time. At the current price, it offers a nice dividend yield of close to 5.3%.
Manulife stock
Manulife (TSX:MFC) stock has been resilient in a rising interest rate environment. In fact, the stock has climbed close to 9% since 2022. Indeed, the life and health insurance company could benefit from the interest rate change as a good portion of its portfolio is in fixed-income investments. So, it could realize higher interest income.
At $24.46 per share, the dividend stock appears to be undervalued, trading at approximately 7.5 times adjusted earnings compared to its estimated earnings-per-share compound annual growth rate of about 11.7% over the next three to five years. Importantly, MFC offers a nice dividend yield of close to 6%. Its payout ratio is estimated to be sustainable at about 44% of adjusted earnings this year.
Additionally, Manulife is a Canadian Dividend Aristocrat with a five-year dividend growth rate of 10%. If it achieves the forecast earnings growth rate of about 11.7%, it can continue to provide similar dividend growth over the next five years.
Investor takeaway
To summarize, when deciding between dividend stocks and GICs, think about your risk tolerance, investment horizon, and income-generation target for that capital. Typically, higher risk investments could deliver greater returns in the long run.
