History has shown passive investors overtake active investors when it comes to returns. The best investing strategy is to buy the stocks of companies you are sure of and forget them. A company with a resilient business model would be better prepared to withstand crisis and benefit from the changing economy. To adopt the long-term investing strategy, look for stocks that can grow in the next 10 to 15 years. TSX Dividend Aristocrats have sustainable business models, regular and growing dividends, and the ability to adapt to the changing economy.
Long-term investing strategy
If you are 35 years and above and have never invested in a Tax-Free Savings Account (TFSA), you have an accumulated contribution room of $95,000 since 2009. If you were to go the dividend route, how long would it take to turn $95,000 into $1 million?
When using a dividend strategy, it always pays to buy the dip and lock in a higher yield. A yield of 8-10% can boost your long-term compounding efforts and help you achieve a higher return. If we look at the compounded annual growth rate (CAGR) formula, a portfolio with 12.5% CAGR can convert your $95,000 into $1 million in 20 years.
To achieve a 12.5% CAGR with TSX dividend stocks, you need to invest in stocks with a yield of over 8% and grow their dividends at a CAGR of at least 5%. How did I arrive at this number?
How to build a $1 million portfolio with TSX dividend stocks
| Year | Price per share | New Shares added | Compounded share count | Dividend per share (5% CAGR) | Total Dividend |
| 2024 | $100.00 | 950 | 950.00 | $8.00 | $7,600.00 |
| 2025 | $103.00 | 73.79 | 1023.79 | $8.40 | $8,599.81 |
| 2026 | $106.09 | 81.06 | 1104.85 | $8.82 | $9,744.76 |
| 2027 | $109.27 | 89.18 | 1194.03 | $9.26 | $11,057.88 |
| 2028 | $112.55 | 98.25 | 1292.27 | $9.72 | $12,566.14 |
| 2029 | $115.93 | 108.40 | 1400.67 | $10.21 | $14,301.20 |
| 2030 | $119.41 | 119.77 | 1520.44 | $10.72 | $16,300.29 |
| 2031 | $122.99 | 132.54 | 1652.98 | $11.26 | $18,607.24 |
| 2032 | $126.68 | 146.89 | 1799.86 | $11.82 | $21,273.76 |
| 2033 | $130.48 | 163.05 | 1962.91 | $12.41 | $24,360.94 |
| 2034 | $134.39 | 181.27 | 2144.18 | $13.03 | $27,941.12 |
| 2035 | $138.42 | 201.85 | 2346.03 | $13.68 | $32,100.07 |
| 2036 | $142.58 | 225.14 | 2571.17 | $14.37 | $36,939.68 |
| 2037 | $146.85 | 251.54 | 2822.72 | $15.09 | $42,581.21 |
| 2038 | $151.26 | 281.51 | 3104.23 | $15.84 | $49,169.27 |
| 2039 | $155.80 | 315.60 | 3419.83 | $16.63 | $56,876.59 |
| 2040 | $160.47 | 354.44 | 3774.26 | $17.46 | $65,909.93 |
| 2041 | $165.28 | 398.77 | 4173.03 | $18.34 | $76,517.26 |
| 2042 | $170.24 | 449.46 | 4622.49 | $19.25 | $88,996.52 |
| 2043 | $175.35 | 507.53 | 5130.02 | $20.22 | $103,706.47 |
| 2044 | $180.61 | 574.20 | 5704.22 | $21.23 | $121,079.93 |
| $1,030,245.39 |
To build an expected returns model, take a base stock price of $100 and try permutations and combinations of dividend yield, dividend-growth rate, and stock price growth. I took an 8% annual yield. A $95,000 investment will buy you 950 shares, which gives $7,600 in dividends.
Most dividend stocks are range-bound, but some hybrid stocks give long-term capital appreciation. I took a conservative estimate wherein the stock price grows at a CAGR of 3%. As for the dividend-growth rate, it should be higher than inflation. In my model, I assume a dividend CAGR of 5%.
Once you lock in an 8% yield and 5% CAGR, dividend reinvestment will compound your share count and dividend income. At the end of the 21st year, the value of your shares could grow above $1 million (5,704 shares trading at $180.6 per share), and they could give over $121,000 in annual passive income.
TSX dividend stocks to execute long-term investing strategy
Telus (TSX:T) and Manulife Financial (TSX:MFC) have a dividend CAGR of over 6%. However, their yield is low at 6.81% and 4.94%. Moreover, the latter paused its dividend growth during the financial crisis. However, 20 years is a long time, and there could be an acceleration or deceleration in the growth rate. The two stocks can give you sector diversification and a dividend CAGR of 7% and 10.8%, respectively. Hopefully, when economic conditions improve, they can accelerate their dividend growth.
Most dividend stocks are range-bound. Manulife stock has surged just 42% in 20 years, growing at a CAGR of 1.2%. Telus’s share price surged at a CAGR of 6.1%. Manulife can buy more DRIP shares and accelerate compounding, while Telus can lock in higher yields.
