Investors often fall into the trap of focusing exclusively on dividends when building their portfolios for passive income. It’s easy to see why. Dividends provide immediate, tangible cash flow and can feel like the most straightforward path to financial freedom. However, limiting yourself to dividend-paying stocks without considering total returns can mean missing out on immense opportunities to grow your wealth. A more holistic approach, blending income and growth, is often a smarter strategy for long-term success.
Dividend for the win
Dividends are like the steady paycheque of the investing world. A high-yield stock might look appealing, but if the underlying dividend stock isn’t growing, its stock price may stagnate or, worse, decline. Over time, inflation can eat away at the value of those dividends, leaving your purchasing power diminished. Conversely, including stocks with moderate or even low dividends but significant growth potential can lead to stronger total portfolio returns. By reinvesting both your dividends and the gains from price appreciation, you tap into the magic of compounding.
Take Hydro One (TSX:H) as an example. This Canadian utility giant is a dependable dividend stock, offering a forward annual dividend yield of 2.74%. But stopping at the dividend ignores what makes Hydro One truly shine: its strong financials, stable growth, and potential for capital appreciation. Over the past year, the company’s quarterly revenue has grown by an impressive 13.3% year over year, with steady earnings growth of 3.9%. For a utility dividend stock operating in a regulated market, these figures highlight its ability to deliver reliable returns, even in challenging economic climates.
Hydro One’s recent earnings report underlines its strength. Its trailing 12-month (TTM) revenue stands at $8.37 billion, supported by a robust operating margin of 26.83%. This shows the dividend stock’s operational efficiency in converting revenue into profit. Plus, Hydro One’s return on equity (ROE) of 9.59% demonstrates that management is putting shareholder capital to good use, generating healthy returns for investors. With a beta of just 0.34, the dividend stock is also far less volatile than the broader market.
Why Hydro One
If you have $15,000 to invest, Hydro One could be a compelling option. While its dividend yield may not be as high as some other stocks, the combination of its consistent payouts and long-term growth potential offers a balanced investment opportunity. The dividend stock’s valuation metrics, such as its price-to-earnings (P/E) ratio of 24.28, reflect its stability and future potential, particularly in a sector that thrives on regulated revenue streams. Hydro One’s balance sheet further supports its case, with a strong operating cash flow of $2.6 billion in the TTM, ensuring it has the resources to continue rewarding shareholders while reinvesting for growth.
Hydro One’s future outlook is equally promising. As Canada transitions to renewable energy and modernizes its energy infrastructure, Hydro One is poised to benefit from increased demand for its services. The dividend stock’s investments in grid modernization and clean energy initiatives align with long-term trends in the energy market. These projects not only drive future revenue growth but also solidify Hydro One’s reputation as a forward-thinking and reliable utility provider.
Another aspect that makes Hydro One attractive is its balanced approach to earnings allocation. With a payout ratio of 64.61%, the dividend stock retains enough earnings to fund new growth projects while ensuring regular dividend payouts. The dividend isn’t the only story here. Hydro One’s stock price has shown consistent resilience and moderate growth, reflecting its strong financial footing and future potential. By focusing on total returns, investors can leverage both the immediate benefits of dividend payouts and the long-term gains from capital appreciation.
Bottom line
So, how much could you earn from a $15,000 investment? If shares go up 19% like last year, here is what that could turn into.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY | INVESTMENT |
| H – now | $46.20 | 325 | $1.26 | $409.50 | quarterly | $15,000 |
| H – 19% | $55 | 325 | $1.26 | $409.50 | quarterly | $17,875 |
By combining reliable payouts with steady growth, investors could gain $2,875 in returns and $409.50 in dividends. That’s total passive income of $3,284.50! So, while dividends are an excellent starting point, including total returns in your investment strategy can unlock even greater opportunities.
