With inflation cooling off and interest rates on the decline in Canada and the United States, investors now have an excellent opportunity to buy high-quality dividend stocks for their portfolio, such as Dollarama (TSX:DOL).
Dollarama is one of the best stocks that Canadian investors can buy for several reasons.
Firstly, it’s a high-quality company and a well-known brand with tremendous long-term growth potential. However, in addition to being a high-quality growth stock, Dollarama also pays a dividend and has plenty of defensive qualities.
So, let’s look at whether Dollarama stock is worth buying today and whether dividend investors, growth investors, or both should consider buying the stock.
Is Dollarama stock worth buying today?
When it comes to investing for the long haul, generally, the best investments come from buying the highest quality companies possible and holding them for years.
It’s important to buy stocks as cheaply as possible. However, at the end of the day, a high-quality growth stock with decades of potential that you paid a slight premium for will almost certainly outperform a business that you bought undervalued but that struggles to grow.
Dollarama doesn’t have that problem. As a discount retailer, it consistently sees strong demand from consumers looking to save money and buy affordable essentials and household staples. This is especially the case as the economy weakens, making Dollarama highly recession-resistant.
Furthermore, it also continues to grow its sales and profitability by opening new stores, improving its merchandising, and raising prices. Not to mention, Dollarama also has a significant stake in the rapidly growing Latin American dollar store chain, Dollarcity.
In just the last two years, Dollarama stock has grown its sales by over 16% each year. Additionally, over that stretch, its normalized earnings per share have increased by at least 26.5% each of those years.
And as profitability grows, the stock continues to increase its dividend. In fact, despite having a low yield, Dollarama is actually on the Canadian dividend aristocrat list, with 12 straight years of dividend increases.
So why does Dollarama pay such a small dividend if the stock consistently increases its earnings year over year, and does that impact whether or not Dollarama stock is worth buying today?
Why is Dollarama’s dividend yield just 0.2%?
When it comes to companies paying dividends, often only well-established and profitable stocks return capital to investors. This is because in order to consistently withdraw money from the business to pay investors, companies have to have a strong likelihood of generating profit quarter over quarter or year over year.
So, in general, dividend stocks are some of the most reliable businesses to buy since they have to be well-established and profitable to begin paying a dividend in the first place.
So why does a stock like Dollarama pay such a minimal dividend despite earning more than $1 billion in profits last fiscal year? The simple answer is that it can create more value for shareholders by keeping the majority of its earnings.
To put it simply, right now, Dollarama has so much growth potential and continues to expand its business at such an impressive pace that it makes more sense for the company and for investors to continue reinvesting the profits in the business rather than return the cash to investors. This is typical of any high-quality company still in the growth stage.
With Dollarama keeping the majority of its money to invest in growing its operations, it can expand its business faster than it otherwise could if it paid a bigger dividend. And that faster growth is leading to significant capital gains.
In fact, over the last decade, Dollarama stock has earned investors a total return of 817% or a compound annual growth rate (CAGR) of 24.8%, thanks largely to all the capital it continues to reinvest in growth.
Furthermore, over time, as it continues to get bigger and as its growth rate inevitably slows down, you can be sure management will begin to return more capital to shareholders, and its dividend yield will rise.
So whether you prefer growth stocks or companies that pay a significant dividend, there’s no question that Dollarama is one of the best long-term investments on the TSX and is certainly worth buying for its 0.2% dividend today.
