Dividend Fortunes: 2 Canadian Stocks Leading the Way to Retirement Wealth

When considering dividend fortunes, it’s vital to look beyond yield alone. Perhaps a blended approach of yield and growth is the way to go.

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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, it’s 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 market’s 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 don’t 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 Brookfield’s effective execution of its business strategy, which involves divesting non-core assets and optimizing capital structure to promote growth.

Brookfield’s 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 Total Return Level Chart

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 doesn’t 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 Dollarama’s 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, it’s 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.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng has positions in Brookfield Renewable Partners. The Motley Fool recommends Brookfield Renewable Partners. The Motley Fool has a disclosure policy.

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