In Canada, you have several options for dividends. For instance, there are dividend stocks that pay stable quarterly dividends, stocks that grow their dividends, stocks that give high yields, and stocks that offer dividend reinvestment plans (DRIP). There are also stocks that give both dividends and growth. Each of these stocks carries inherent risk. Which of them should you consider buying?
Source: Getty Images
Two magnificent dividend stocks to buy
The best way to select a stock is to look forward 10 years and ask yourself which stock generated better returns. Here are two magnificent dividend stocks you could consider buying. They have the potential to compound your returns significantly in the next 10 years.
Telus
Telus Corporation (TSX:T) stock is an opportunistic buy since it is trading closer to its multi-year low. All telecom stocks have been in a downturn because of high interest rates and rising competition. For the last 12 months, telecom prices were the only thing going down during high inflation as Telus and BCE competed over prices to capture market share after Rogers Communications acquired Shaw. However, things are settling down, and Telus and BCE have ended the price war. Moreover, the Bank of Canada has resorted to rate cuts.
The 40% dip in share price since the rate hike began in April 2022 is gradually recovering. The stock has surged almost 10% since July after the interest rate cut began. Now is the time to buy the stock and lock in a yield of 6.8%. The telco has been growing its dividend at an average annual rate of 7% and can continue to do so as it unlocks 5G opportunities.
Manulife Financial
While Telus stock is trading at a discount, Manulife Financial (TSX:MFC) stock is trading at a decade-high. The high stock price has reduced its dividend yield to 4.3%. The insurer has been paying regular quarterly dividends and growing them at an average annual rate of 9%. It enjoys regular cash flows and has the potential to sustain this growth for the coming 10 years. The stock is a buy even at its decade-high stock price.
Returns these dividend stocks could give 10 years from now
Both Telus and Manulife offer a DRIP that will help you compound returns. Let’s take the example of Manulife. The stock generally trades in the $27 to $30 range. The decade-high price is not sustainable. Thus, I assumed the stock price will peak at $40 next year and then gradually correct to $30. The stock price matters as a DRIP buys stocks at their current price.
| Year | MFC Stock Price | New DRIP Shares Added | Total Share Count | MFC Dividend per Share (9% CAGR) | Total Dividend Amount |
| 2024 | $36.73 | 272.00 | 272.00 | $1.600 | $108.81 |
| 2025 | $40.00 | 2.72 | 274.72 | $1.744 | $479.11 |
| 2026 | $35.00 | 13.69 | 288.41 | $1.901 | $548.25 |
| 2027 | $30.00 | 18.28 | 306.68 | $2.072 | $635.46 |
| 2028 | $30.00 | 21.18 | 327.87 | $2.259 | $740.50 |
| 2029 | $30.00 | 24.68 | 352.55 | $2.462 | $867.91 |
| 2030 | $30.00 | 28.93 | 381.48 | $2.683 | $1,023.65 |
| 2031 | $30.00 | 34.12 | 415.60 | $2.925 | $1,215.58 |
| 2032 | $30.00 | 40.52 | 456.12 | $3.188 | $1,454.16 |
| 2033 | $30.00 | 48.47 | 504.59 | $3.475 | $1,753.47 |
| 2034 | $30.00 | 58.45 | 563.04 | $3.788 | $2,132.68 |
A $10,000 investment in Manulife will buy you 272 shares. These shares can give you $108.80 in dividends for the fourth quarter. This dividend could buy you 2.72 DRIP shares. In a DRIP, you can also have a share count in decimal points. Assuming the company increases its dividend at an average annual rate of 9%, your 274.72 shares can give a higher dividend of $479 in 2025.
While a DRIP will compound your returns by reinvesting the dividend, the future decline in stock price will help you procure more shares. These shares will give a higher dividend from the 9% dividend growth.
By the end of 10 years, your $10,000 investment can give you $2,132 in annual dividends.
