The first step in building wealth is spending less than you make so that you develop a habit of saving. By investing your savings, you can build wealth. Investing in TSX dividend stocks is a good way to build wealth. Typically, stocks that pay consistent (and ideally growing) dividends are profitable businesses that are willing to share their wealth with shareholders in the form of dividend payments.
So, the idea is to find dividend stocks with underlying quality businesses that make sustainable earnings or cash flow. Diversify your portfolio across industries and sectors to spread your risk. And try not to overpay for stocks.
Typically, stocks that tend to trade with little discounts most of the time are top-notch businesses. In other words, it would be rare to find them at meaningful discounts. That said, dividend stocks do trade at decent discounts under certain scenarios. At such times, it may be buying opportunities for more immediate income and higher estimated long-term returns. For example, since 2022, interest rates have gone higher, pushing down stock valuations and boosting dividend yields.
Since eligible Canadian dividends are taxed at lower rates than interest income, Canadian investors might hold dividend stocks in non-registered accounts. For example, if you were a British Columbian earning $70,000 in taxable income this year and you earned an extra $1,000 in interest income, it would be after-tax income of $718.
In comparison, if you earned an additional $1,000 in eligible Canadian dividend income instead, you would keep $983.70, which is $265.70 more! Imagine if you earned $10,000 in dividend income, you would keep $9,837, which is $2,657 more than the same amount of interest income.
Bank of Montreal
Canada has a supportive regulatory environment for domestic banks, allowing the big Canadian banks to maintain their leading positions in the country and earn good returns. Because of their durable profits, the big Canadian banks have been reliable dividend payers for decades.
Specifically, Bank of Montreal (TSX:BMO) has made dividend payments since 1829. For your reference, its 10-year dividend-growth rate is 6.8%, which was supported by adjusted earnings-per-share growth of about 8.2% per year in the period.
Because of higher interest rates since 2022, the banks are expected to experience higher credit losses. BMO’s fiscal year-to-date provision for credit losses (PCL) jumped to $1.7 billion versus $87 million in the prior-year period. Another weight on earnings was a $4.2 billion increase in non-interest expense to $15.6 billion.
Net income ended up being 70% lower at $2.8 billion year over year. Adjusted earnings that were down 5% year over year to $6.5 billion show a more normalized picture of the business. Investors should also note that BMO’s PCL on impaired loans to average net loans and acceptances remained low at 0.17% fiscal year to date, although it is a big jump from 0.08% a year ago.
The Canadian bank stock has what it takes to keep its dividend safe. Its payout ratio is estimated to be about 60% of adjusted earnings this fiscal year. At $110.43 per share at writing, BMO stock offers a nice dividend yield of 5.3%. You can also expect dividend growth over the long term. So, long-term investors essentially get a perpetual passive income stream that will grow over time. At the recent quotation, analysts believe the stock trades at a discount of close to 13%. Notably, BMO will be reporting its fourth quarter (Q4) and full-year fiscal 2023 results in about a week.
To safely build wealth in the long run, investors can populate their diversified portfolio with solid dividend stocks at good valuations. For example, a $100,000 portfolio earning a 5% yield will make $5,000 in favourably taxed income in the first year. If you build the portfolio correctly, little management will be needed, and it would have the potential to grow the dividend income at a pace that’s faster than inflation to improve your purchasing power.
