Given the average Canada Pension Plan (CPP) payout for a 65-year-old starting the payment in 2024 is $816.52, it makes little sense to just bank on this government benefit to fund your retirement expenses. In fact, retirees should try to create multiple sources of passive income and boost their CPP pension amid rising inflation and the higher cost of living.
One low-cost way to create a passive-income stream is to invest in quality dividend stocks with a growing payout. Let’s see how.
Identify quality dividend stocks
While dividend investing is a popular strategy, investors should avoid chasing companies with high dividend yields. In addition to a company’s yield, it is essential to consider other factors such as its balance sheet debt, payout ratio, free cash flow growth, capital investments, and profitability.
As a company’s stock price and dividend yield are inversely related, you should always look for beaten-down stocks when trading at a discount. In addition to a tasty yield, you could also benefit from capital gains when investor sentiment improves.
For example, in the last two years, companies in capital-intensive sectors such as energy, real estate, infrastructure, and renewables have trailed the broader markets by a wide margin due to rising interest rates. In fact, debt-heavy companies such as Algonquin Power and Northwest Healthcare were forced to lower dividends as their payout ratios were unsustainable.
With interest rates moving lower, quality stocks should outpace broader market returns in the future. One such dividend stock that trades south of the border is American Tower (NYSE: AMT). Valued at a market cap of US$110 billion, American Tower stock has returned close to 2,000% to shareholders in dividend-adjusted gains since September 2004.
Trading 22% below all-time highs, American Tower stock pays shareholders an annual dividend of US$6.48 per share, translating to a forward yield of almost 3%.
Why I’m bullish on American Tower stock
American Tower is among the largest real estate investment trusts (REITs) globally. It is a leading independent owner, operator, and developer of multi-tenant communications real estate with a portfolio of over 200,000 communication sites.
After growing its adjusted funds from operations (FFO) at a double-digit pace for several years, American Tower’s FFO rose by just 2.1% year over year in 2023. However, it increased dividends by 3.2% annually in the second quarter (Q2) of 2024.
In the June quarter, American Tower’s adjusted FFO grew by 13.5% year over year to US$1.3 billion or US$2.97 per share. The REIT increased its FFO by 10% in Q1 of 2024 after it declined by 2.1% in the last quarter of 2023.
Moreover, American Tower increased free cash flow by 27.5% to US$1 billion, while its dividend payments were much lower at US$757 million. So, American Tower is generating enough cash to pay shareholders a dividend and cover its interest payments. In the last 12 years, American Tower has increased its dividends by 18% annually, which is exceptional.
Recently, American Tower agreed to sell its India operations to a Brookfield Asset Management affiliate. The asset sales should bring in between US$2 billion and US$2.5 billion, which could be used to shore up its balance sheet and invest in organic growth or acquisitions.
Priced at 33 times forward earnings, AMT stock is not too expensive, given analysts expect adjusted earnings to rise by 32% annually in the next five years.
The Foolish takeaway
Canadian retirees should identify other quality dividend stocks across sectors and create a diversified portfolio that lowers investment risk. Ideally, these stocks should consistently raise their dividends and increase the yield at cost over time.
