Beat the TSX With These Cash-Gushing Dividend Stocks

Looking to earn a gushing stream of dividends? Don’t just look at TSX stocks with big dividend yields. Look at these types of stocks instead.

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If you want to beat the TSX and collect some nice dividends, you are going to have to increase your business/stock quality and potentially decrease your dividend yield.

There is no point buying an outsized dividend yield (like in the 7%-plus range) if your stock price declines by multiples of your yield. Stocks with outsized dividend yields normally indicate serious business issues. The chances of a dividend cut increases drastically as a stock’s yield climbs. You don’t want this situation to arise in your portfolio; it is just too risky.

A small yet fast-growing dividend can be powerful

Stocks that consistently beat the TSX tend to pay smaller dividend yields (like in the 2–5% range) and regularly grow their dividend payments. If you want to beat the TSX, you want companies that consistently compound a majority of their cash back into the business.

As their earnings/cash flows grow, they tend to increase their dividend. However, it rarely works by the inverse. If you are looking for some cash-gushing dividend stocks, here are three nice TSX stocks to look at buying right now.

A stable and growing TSX dividend stock

Canadian National Railway (TSX:CNR) has been an incredible cash cow over the years. It has increased its free cash flow per share by over five times in 20 years. CNR has compounded its annual dividend by over 15% for two decades. Its dividend is up nearly 16 times in that period.

CNR’s payout ratio has safely stayed below 40%, so it has always had room to re-invest in growth opportunities as they arise. Speaking about growth, the company plans to grow earnings per share by a low-teens rate over the coming 3 to 4 years.

With an industry-leading balance sheet, it is very likely to keep up its mid-teens dividend growth rate. It only yields 2% today. However, for a combination of stable income and capital growth, CNR is one of the best stocks in Canada.

A financial stock with more room to grow

Another TSX stock that has delivered strong total returns is goeasy (TSX:GSY). Its stock is up 278% over the past five years. That is a steep beat versus the TSX Composite Index’s 54% return over the same time.

goeasy has increased its annual earnings per share by ~30% per year since 2014. Its annual dividend has grown at the same rate while its payout ratio has stayed constant over the years.

goeasy is Canada’s largest non-prime lender. While its clients tend to be riskier consumers, it has delivered solid results through a variety of tough markets before.

With a smart management team and great retail network, the lender is likely to continue its solid growth formula going forward. This TSX stock yields 3.6% right now.

This TSX stock has compounded an incredible dividend

If any TSX stock is gushing cash, it has to be Canadian Natural Resources (TSX:CNQ). After hitting its debt target early this year, it announced that it plans to return 100% of its excess generated cash right back to shareholders.

With oil trading over US$80 per barrel, CNQ should generate some attractive excess income. With decades of reserves on hand, it can deliver substantial amounts of cash back to shareholders in the years ahead.

CNQ has grown its dividend by a 21% compounded annual rate over 24 consecutive years. It has paid a few special dividends in that time. For income and market-beating returns, this is as good as it gets in Canada.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Robin Brown has positions in goeasy. The Motley Fool recommends Canadian National Railway and Canadian Natural Resources. The Motley Fool has a disclosure policy.

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