The strength of the TSX lies in its dividend stocks. The current situation of high interest rates and the housing bubble burst has pulled down the price of some dividend stocks. Buying them at this dip can help you lock in a yield of 6 to 9%.
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Dividend stocks vs. term deposits
A 6% dividend yield is an attractive option against banks’ 3.8% interest on term deposits, considering the interest rate will fall as the Bank of Canada starts rate cuts. Whereas the dividend per share will continue to grow for another 10 years or more if the business conditions remain favourable. Moreover, you can compound your dividends with a dividend reinvestment plan (DRIP).
In compounding, you reinvest interest to earn more interest. If you earn $10 interest on a $100 investment in one year, you will earn $11 in interest in year two on a $110 investment ($10 interest reinvested). DRIP has a similar mechanism.
Two magnificent dividend stocks you’ll be glad you bought today
When you understand how compounding using dividend growth stocks can grow your portfolio, you will pat your back 10 years from now. I will take two dividend stocks: a high dividend yield stock with no DRIP and a low yield stock with DRIP.
Telus Corporation (TSX: T) has a 6% dividend yield and has been growing dividends for 19 years at a compounded annual growth rate (CAGR) of 11.5%. The telco increased the January quarterly dividend by 3% from the previous quarter. T also offers a DRIP option wherein it reinvests the dividend to buy more stock of Telus without brokerage fees.
Slate Grocery REIT (TSX: SGR.UN) has a 9% dividend yield and has been growing its distributions for eight years at a CAGR of 2%. It does not offer a DRIP option. So, if you want to compound your dividends, you have to collect the payout and buy more shares of Slate Grocery REIT while paying brokerage fees.
Telus Corporation has slowed its dividend growth to 5 to 7% in the last few years. If you invest $3,500 in each of the two stocks, using Telus’ DRIP option and Slate’s normal investing, your payout could look something like this 10 years from now.
Passive income from these two dividend stocks 10 years from now
| Year | New Telus DRIP shares | Total share count Telus | Telus dividend per share (6% CAGR) | Total dividend income on Telus | Slate Grocery REIT dividend per share (3% CAGR) | Total dividends on 269 shares of Slate Grocery REIT |
| 2024 | 140 | $1.5152 | $212.12 | $1.19 | $320.11 | |
| 2025 | 7.07 | 147.07 | $1.6061 | $236.21 | $1.23 | $329.71 |
| 2026 | 7.87 | 154.94 | $1.7024 | $263.78 | $1.26 | $339.60 |
| 2027 | 8.79 | 163.74 | $1.8046 | $295.48 | $1.30 | $349.79 |
| 2028 | 9.85 | 173.59 | $1.9129 | $332.05 | $1.34 | $360.29 |
| 2029 | 11.07 | 184.65 | $2.0276 | $374.41 | $1.38 | $371.10 |
| 2030 | 12.48 | 197.13 | $2.1493 | $423.70 | $1.42 | $382.23 |
| 2031 | 14.12 | 211.26 | $2.2782 | $481.30 | $1.46 | $393.69 |
| 2032 | 16.04 | 227.30 | $2.4149 | $548.92 | $1.51 | $405.51 |
| 2033 | 18.30 | 245.60 | $2.5598 | $628.69 | $1.55 | $417.67 |
| Total | $3,796.66 | $3,669.70 |
A $3,500 investment in Telus today could buy you 140 shares at $25. These shares could give you $212 in dividends. The DRIP will reinvest this income to buy new DRIP shares. For ease of calculation, I assumed an average share price of $30 for the next 10 years. The $30 price is in the upper range, as the stock traded in the $18 to $30 range in the last 10 years.
The $212 dividend income can buy 7.07 shares at $30 at the start of 2025 (In a DRIP, you can buy less than one share as well.). Assuming Telus grows its dividend at a 6% CAGR, the dividend per share would be $2.559 by 2023. New DRIP shares will increase your share count to 245.6 shares from 140 shares and earn you $628 in annual dividends in 10 years.
A $3,500 investment in Slate Grocery REIT will buy you 269 units at $13. If the REIT increases its distribution at a 3% CAGR, these 269 units will earn you $417.60 in annual dividends.
If you calculate the total 10-year dividend, Telus earned $127 extra over Slate Grocery REIT.
