Buying a dividend aristocrat on the dip can go a long way towards building wealth slowly. Do you have $20,000 in cash sitting idle in your Tax-Free Savings Account (TFSA) from liquidating your past investments? You could consider buying into dividend stocks and let your investment generate a payout of $656 every quarter over time.
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Two stocks to help turn $20,000 into $656 every quarter
You could consider investing in Telus Corporation (TSX:T) and Power Corporation of Canada (TSX:POW). They grow dividends at a compounded annual rate (CAGR) of 7% and 6%, respectively.
Telus
Telus’ management has set a target to grow dividends by 7 to 10% annually between 2023 and 2025. The company aims to ensure that dividend growth does not affect its operating cash flow. Thus, it pays 60 to 75% of its free cash flow (cash left after deducting capital expenditure) as dividends. It has grown its dividend for 19 years by expanding its subscriber base and increasing its cash flow.
Telus also offers the dividend reinvestment (DRIP) option wherein it buys more income-generating shares of Telus from the dividend money. If you opt for the DRIP, you can save on brokerage costs as you will directly buy shares from the company. A growth rate of 7% may not be sustainable for long. Thus, I take a conservative estimate and expect a 6% dividend CAGR in the long term.
Power Corporation of Canada
Power Corporation of Canada offers a no-DRIP option, but it grows its dividend at a CAGR of 6 to 7%. POW is a financial services holding company that owns a 100% stake in some strong dividend payers like life insurance companies – Canada Life and Irish Life. It also owns wealth management and private equity companies that cater to Europe, Canada, and the United States.
The holding company earns dividends from its operating companies and passes it on to shareholders. POW slightly diversifies your investment amount to different financial services, reducing the risk of a dividend cut. Also, the company resumed its dividend growth in 2014 after a long pause from the 2009 global financial crisis.
Although it grew its dividends by 6% in 2023, I expect 4% dividend growth over the long term.
By investing $10,000 each in the above two stocks, you can secure a quarterly payout of $656.
How these two stocks can help turn $20,000 into $656 every quarter
A $656 quarterly income translates into a $2,624 annual dividend and a 13% annual return on a $20,000 investment. And no safe dividend stock gives a 13% payout (Telus and POW have dividend yields of 6.17% and 5.3%, respectively). You can increase this yield to 13% by staying invested and letting the companies do the rest.
| Year | New Telus DRIP shares | Total share count Telus | Telus dividend per share (6% CAGR) | Total dividend income on Telus | POW dividend per share (4% CAGR) | Total dividend income on 252 shares of POW |
| 2024 | 410 | $1.5152 | $621.22 | $2.184 | $550.37 | |
| 2025 | 20.71 | 430.71 | $1.6061 | $691.75 | $2.271 | $572.38 |
| 2026 | 23.06 | 453.77 | $1.7024 | $772.51 | $2.362 | $595.28 |
| 2027 | 25.75 | 479.52 | $1.8046 | $865.33 | $2.457 | $619.09 |
| 2028 | 28.84 | 508.36 | $1.9129 | $972.42 | $2.555 | $643.85 |
| 2029 | 32.41 | 540.77 | $2.0276 | $1,096.49 | $2.657 | $669.61 |
| 2030 | 36.55 | 577.32 | $2.1493 | $1,240.84 | $2.763 | $696.39 |
| 2031 | 41.36 | 618.68 | $2.2782 | $1,409.52 | $2.874 | $724.25 |
| 2032 | 46.98 | 665.67 | $2.4149 | $1,607.55 | $2.989 | $753.22 |
| 2033 | 53.59 | 719.25 | $2.5598 | $1,841.17 | $3.109 | $783.35 |
A $10,000 investment in POW now will buy you 252 shares and give $550 in annual dividends in 2024. Assuming the company maintains a 4% dividend CAGR, your 252 shares can earn $783 in annual dividends in 10 years.
As for the $10,000 investment in Telus, you can buy 410 shares, which can give $621. But if you opt for the DRIP, Telus will buy 20.7 new DRIP shares from this dividend. If it continues to grow the dividend at 6%, a higher dividend per share plus more shares can compound your dividends.
At the end of 10 years, your 410 shares could become 719.25 (a DRIP can give shares in decimals) and $1,841 in annual dividends. Adding together these two dividend incomes could earn you an annual payout of $2,624 by 2033 on the $20,000 you invest today.
