When you invest in stocks, you’re investing in the underlying businesses. In other words, you believe that these businesses will become more profitable over time, and you’ll benefit from an appreciating stock price.
Some businesses make such durable profits that they are able to pay out dividends periodically, providing nice income for their investors while they wait for price appreciation. Most dividend stocks pay out dividends quarterly, though there are some that pay out monthly, semi-annually, or annually.
Here are some of the best TSX stocks to invest if you have an extra $1,000 lying around that you don’t need for a long time.
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Sun Life stock
Blue-chip stocks like Sun Life Financial (TSX: SLF) that pay safe and growing dividends provide peace of mind for long-term investors. You can count on the life and health insurance company to grow its profits over time. In the past decade, it more than doubled its adjusted earnings per share, which increased almost 9% per year.
In the last 10 years, the stock delivered annualized returns of about 10%. The stock is actually trading at a lower valuation than at the start of the decade when it was at a price-to-earnings ratio (P/E) of about 13. At $67.90 per share at writing, it trades at a blended P/E of about 10.6. So, it’s a very reasonable valuation to pay for the stock that offers a good dividend yield of 4.8%.
Let’s be conservative and assume it’s able to grow its earnings by 6% per year, along with its dividend and with little valuation expansion, investors could expect long-term returns of about 11%.
Magna International stock
For investors looking for more adventure, they can explore Magna International (TSX: MG) as a potential investment over the next three to five years. Like Sun Life, Magna stock is a dividend grower. However, it is a cyclical stock, so its earnings and dividend growth are more unpredictable.
For example, during the last two recessions, it experienced substantial declines in its earnings. In the last recession, for the 2020 pandemic year, it witnessed its adjusted earnings per share falling 38%. However, management still persisted with a token dividend raise. Its three-, five-, and 10-year dividend-growth rates are 4.8%, 6.9%, and 11%, respectively, while its last dividend hike in February was 3.3%.
Because it is a cyclical stock, it could also experience strong, double-digit earnings growth during times of economic expansion. As an example, an investor who timed their investment perfectly could have scored a homerun by tripling their money from buying at the pandemic market bottom in March 2020 and selling in May 2021.
The large-cap stock maintains a solid balance sheet and enjoys an S&P credit rating of A-. Furthermore, it targets a low payout ratio to keep its dividend safe. For instance, its payout ratio was about 34% of adjusted earnings last year.
At $60.91 per share at writing, analysts believe the auto parts company is discounted by more than 20%. Additionally, it offers a dividend yield of 4.3%, which is relatively high for the company.
