Dividends calling? In the unpredictable stock market where there is no guarantee of returns, dividend stocks give you some assurance of a payout in the long term. How are they different from other stocks?
Most companies that pay dividends have a business model which earns a minimum sustainable cash flow. As their growth is slow, they give returns to shareholders in the form of dividends. Though some companies operate in volatile industries, like technology and automotive, whose revenues are seasonal or cyclical. Thus, their stock returns also fluctuate depending on business conditions.
A top dividend stock with stable cash flows
Power Corporation of Canada (TSX:POW) is a dividend-paying stock. It doesn’t operate any businesses but holds several other operating companies in financial services. Some of its holdings include Canada Life, Irish Life, Empower, Mackenzie Investments, and IG Wealth Management. It holds these companies under Great-West Life and IGM Financial, which operate in the United States, Canada, and Europe.
These operating companies bear operational risk and give dividends to Power Corporation, which it passes to its shareholders. As its dividend sources are diversified, there is a lower risk of dividend cuts. The company highlighted its dividend resilience in the 2009 Global Financial Crisis, which saw many big banks fail, and insurance and investment companies report losses. In the face of the worst crisis in the financial industry, Power Corporation paused its dividend growth but continued to pay $1.16 in annual dividends for six years (2009-2014).
Several economists believe that Canada might face a recession in 2024. Some even said that although the economy does not meet the definition of a recession (two consecutive quarters of negative growth), Canada is already in a recession.
But Power Corporation is resilient to mild recession and could continue growing dividends as it did in the last nine years. Such stocks can help you estimate the returns you could get over the next 5 to 10 years and above.
What to expect from this dividend stock?
Every estimate is based on some assumption. My assumptions are:
- POW increases its dividend at a compounded annual growth rate (CAGR) of 4%.
- Your average cost per share is $40.
- POW does not cut its dividend.
Whatever we discuss below is an estimate and subject to change if any of the above assumptions change during the estimated period (2024-2035).
How to earn an estimated $1,000 in quarterly passive income
Now for the investment strategy. Every year, you invest $4,000 in POW at the start of the year for the next 12 years, resulting in a total investment of $48,000. Try buying the shares at a price lower than $40 to enhance your returns.
| Year | Total POW Shares | Dividend per Share (4% CAGR) | Total dividend |
| 2024 | 100 | $2.184 | $218.40 |
| 2025 | 200 | $2.271 | $454.27 |
| 2026 | 300 | $2.362 | $708.66 |
| 2027 | 400 | $2.457 | $982.68 |
| 2028 | 500 | $2.555 | $1,277.49 |
| 2029 | 600 | $2.657 | $1,594.30 |
| 2030 | 700 | $2.763 | $1,934.42 |
| 2031 | 800 | $2.874 | $2,299.20 |
| 2032 | 900 | $2.989 | $2,690.06 |
| 2033 | 1000 | $3.109 | $3,108.51 |
| 2034 | 1100 | $3.233 | $3,556.14 |
| 2035 | 1200 | $3.362 | $4,034.60 |
A $4,000 investment will buy you 100 shares of POW at $40. If the company increases its 2024 dividend by 4%, you could get $218 in annual dividends. Buying 100 shares every year could increase your income-generating portfolio without burning a hole in your pocket.
In 12 years, you would have bought 1,200 shares and earned an annual dividend of $4,034. Since POW pays dividends quarterly, you can get this $4,034 dividend in four equal installments of $1,008.
Investor takeaway
On a $48,000 investment, you earn a total dividend income of $22,858. If you deduct the payout, you purchased 1,200 shares of POW for $25,141.
You can invest in POW through your Tax-Free Savings Account (TFSA) and let your investment grow tax-free. If you don’t withdraw the dividend amount, you can use that money to buy growth stocks. This way, you can invest more without affecting your TFSA contribution limit.
