When it comes to building wealth through dividends, many investors are naturally drawn to high-yield stocks. The allure of substantial income can be hard to resist. However, itâs essential to exercise caution when chasing these seemingly lucrative options. High yields can often signal increased underlying risks, and dividends from such stocks may be more vulnerable to cuts.
Understanding dividend safety
How can you determine if a dividend yield is too high for comfort? A useful guideline is to double the marketâs average yield. Currently, the Canadian stock market, represented by iShares S&P/TSX 60 Index ETF, yields about 2.9%. Doubling that gives us a threshold of approximately 5.8%. Any yield exceeding this can be seen as potentially risky.
Remember, dividend cuts donât just reduce your income. They typically come with significant declines in stock prices, often occurring before any cut is announced. This underscores the importance of focusing on the sustainability of dividends rather than merely their size.
Brookfield Renewable Partners: A sustainable choice
Brookfield Renewable Partners (TSX: BEP.UN) is a stock worth considering for those seeking reliable dividends without excessive risk. Recently, it gained traction following the announcement of a successful sale of a 745-megawatt portfolio primarily consisting of wind assets and a 1.6-gigawatt development pipeline in Spain and Portugal. This transaction highlights Brookfieldâs effective execution of its business strategy, which involves divesting non-core assets and optimizing capital structure to promote growth.
Brookfieldâs approach involves acquiring fitting businesses, optimizing them, and then potentially selling at a higher valuation — all the while generating substantial cash flow. Priced at $37.64 per unit, the stock currently yields around 5.1%, and analysts believe it is fairly valued.
Notably, Brookfield has a solid track record of increasing its cash distributions, boasting a 10-year cash distribution growth rate of 5.7%. This combination of yield and growth makes it an attractive option for dividend-focused investors.
DOL 10-Year Total Return Level data by YCharts
Dollarama: Growth over yield
On the other end of the spectrum, low-yield stocks can also pave the way to substantial retirement wealth. For instance, Dollarama (TSX: DOL) is an example of how a lower yield doesnât preclude impressive returns. Dollarama is a discount retailer that offers a wide array of consumable products, general merchandise, and seasonal items across approximately 1,569 locations and online. Additionally, it holds a 60% stake in Dollarcity, a growing discount retailer in Latin America.
While Dollaramaâs stock only yields 0.3%, investors should not overlook its remarkable growth potential. Over the past decade, Dollarama has outperformed competitors, achieving revenue and diluted earnings growth at compound annual growth rates (CAGR) of about 16% and 20%, respectively. This impressive performance translated into total returns exceeding 24% per year over the last decade! To illustrate, an initial investment of $10,000 would have grown to around $90,810, showcasing the potential wealth-building power of growth stocks.
The Foolish investor takeaway: A balanced approach to wealth
When considering dividend fortunes, itâs vital to look beyond yield alone. Dividend stocks like Brookfield Renewable Partners and Dollarama are examples of how a balanced approach can lead to substantial retirement wealth.
By focusing on sustainable dividends and growth potential, investors can build a robust portfolio that not only provides income but also fosters long-term wealth creation. Whether you opt for a high-yield stock or a lower-yield growth investment, the key is to align your strategy with your financial goals.
