Canadian investors should start compounding interest with dividends as soon as possible to help build their wealth.
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”
Albert Einstein
You don’t necessarily have to put the dividends received back into the same stocks that generated them. Instead, you can choose to reinvest the dividends, perhaps mix in your savings, to maintain a better balanced diversified portfolio or to invest into your best ideas.
Here are some top dividend stocks you can add to your buy list for your compound interest strategy. They’re good buys now.
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BCE stock
Big Canadian telecoms are generally well known for their big dividends. Currently, BCE (TSX:BCE) offers a very interesting buying opportunity for a massive dividend yield of 7.5% after pulling back about 17% from its peak of close to $62 per share this year.
The company makes annual revenue of approximately $24 billion and generates stable cash flows from its large business. Over the last few years, BCE has invested heavily in its network. So, over the next couple of years, it can very well tune down its capital investments and, thereby, boost its free cash flow generation and improve the safety of its dividend.
Indeed, management is committed to the common stock dividend, as BCE has increased this dividend for approximately 14 consecutive years. For your reference, its 10-year dividend-growth rate is 5.2%, which matches its last dividend hike. All else equal, the stock should experience a rally when the Bank of Canada begins cutting interest rates.
If the telecom continues to increase its dividend by 5% per year, investors can approximate long-term returns of more or less 12%, assuming no valuation expansion and it’s able to increase its dividend healthily. This would be a very respectable return from a blue-chip stock.
Brookfield Infrastructure Partners
Utility stock Brookfield Infrastructure Partners (TSX:BIP.UN) was hit hard by higher interest rates this year, but it has recovered a lot, rising a whopping 44% from the bottom! At $42.03 per unit at writing, it’s still a good buy.
Analysts are calling a consensus 12-month price target that represents upside potential of almost 22%. That in itself would be a great one-year return. But the stock offers more. Its cash distribution yields 4.8% at the recent price. Furthermore, investors can expect another cash distribution increase of at least 5% in February, based on its usual dividend hike schedule. A 5% hike would represent a forward yield of almost 5.1%.
The global infrastructure company is diversified across sectors and geography, with assets in utility, transport, midstream, and data infrastructure across the Americas, Europe, and the Asia Pacific region. Management is also strategic in reinvesting proceeds from the sale of mature assets. Overall, it strives a total rate of return of 12-15%, targets funds from operations per unit growth of north of 10%, and cash distribution growth of 5-9% per year.
Simply put, investors should start compounding interest with stocks that offer decent dividend yields like BCE and Brookfield Infrastructure Partners. To boost the growth rate of your compounding, you can sprinkle your portfolio with dividend stocks that grow their dividends at a faster pace.
