If you’re just starting to invest, you may be overwhelmed by all the information that’s out there. Where do you even start? Don’t worry, though, you can buy stocks one at a time. Initially, you can explore solid businesses you already know, such as Fortis (TSX:FTS) and Toronto-Dominion Bank (TSX:TD).
Because stocks are volatile, you can often buy them on dips. Even defensive utility stocks like Fortis can experience market corrections. Start investing by focusing on safe dividends that can provide more reliable returns (than volatile stock prices).
Dividend safety is something investors need to assess, including checking the earnings quality, sustainability of the payout ratio, and the balance sheet strength of the company. At a high level, you can gauge earnings quality by looking at the earnings history over an economic cycle. Observe data for at least 10 years.
Fortis stock example
For example, Fortis’s adjusted earnings per share have generally witnessed a trend of growth over the last 20 years with highly stable earnings. The worst decline was 6% in 2007, which was not bad at all. Its payout ratio is also sustainable at about 75%. As well, it has a high S&P credit rating of A-, which suggests a robust balance sheet.
Actually, Fortis stock has pulled back to about $54 per share, offering a decent dividend yield of almost 4.4%. Just because a stock has dipped doesn’t mean it’s necessarily cheaper. If its earnings also dropped, than the stock could be actually more expensive from a price-to-earnings (P/E) perspective. However, as we know, Fortis’s earnings are resilient. So, at this quotation, it trades at a P/E of about 17.5, which is a discount of roughly 10% versus its long-term normal levels.
To be clear, the stock trades at a relatively cheap valuation likely due to the interest rate hikes we have experienced since 2022. Generally speaking, higher interest rates dampen business growth and pressure stocks. When rates are eventually cut, you can expect Fortis stock to trade at a higher multiple. Over the next few years, buyers of Fortis stock today could pocket total returns of about 8 to 12% per year.
TD stock example
Toronto-Dominion Bank is an entirely different business but a good dividend stock nonetheless. As a large North American bank, it is subject to the economic health of the North American economy. Obviously, higher interest rates slow down economic growth and directly impact TD’s bottom line.
Not surprisingly, its earnings get hit the hardest around recessions. During the pandemic year of 2020, for example, TD’s adjusted earnings per share dropped 20%. And in the prior recession, during the global financial crisis, the earnings were cut by 15%. Around those times, the stock fell. Experienced investors would know that that was the time to accumulate shares at fire-sale prices! Of course, you would need to endure the volatility that comes with owning stocks, especially in a highly uncertain economic environment.
At $82.70 per share at writing, TD stock trades at a discount of about 10% from its long-term normal valuation. At this quotation, the bank stock offers a nice dividend yield of 4.9%. Long-term investors can consider buying some shares here. As well, TD enjoys an AA- S&P credit rating. Over the next few years, buyers of TD stock today could pocket total returns of about 11 to 13% per year.
Investor takeaway
To summarize, start by investing in quality businesses that you know. Ideally, they would pay safe and growing dividends and trade at good valuations. Focus on the income generation. Only consider investing money you don’t need for a long time in stocks. Think of yourself as a business partner who shares the business profits by receiving dividend income.
By having a long-term investment horizon (of at least three to five years), you can train yourself to ignore the market volatility and allow time for your investments (that are driven by underlying businesses) to grow. It’s also a good idea to diversify your investments across asset classes and sectors.
