When choosing dividend stocks, what’s the first thing you see? For most investors, the honest answer would be the yield. And it makes sense, too, since that’s what “apparently” matters the most in a dividend stock. But that’s not true. The complete picture of dividends (including sustainability) shouldn’t be your entire selection framework for dividend stocks.
You have to look at the whole picture. If you are investing in a dividend stock that slowly and gradually erodes your capital, your overall returns may be paltry despite locking in a decent dividend yield, especially when we add the impact of inflation. So, even when choosing reliable, safe dividend stocks where you can be sure about the long-term sustainability of your dividends, it’s essential to look at the whole picture before making a decision.
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Canada’s first Dividend King
Canadian Utilities (TSX: CU) has the country’s most stellar dividend history. The company has grown its payouts for 53 consecutive years and was the first to earn the title of Dividend King by growing its payouts for half a century.
Its history is not the only thing that makes its dividends rock solid. As a utility company with a heavy electricity lean—58% of adjusted earnings from electricity transmission and distribution in Canada—it has a solid and reliable revenue source. It also has a diversified business, both in terms of utility (1.3 natural gas customers in Alberta alone) and geography, with a modest amount of earnings coming from outside the country.
The company is offering dividends at a decent 5.4% yield. However, there is one area where it has consistently fallen short (in the long term, at least): the capital-appreciation potential. The stock has lost over 17% in the last 10 years, and this has neutralized most of the dividend-based gains it has offered to its investors, as the overall returns for a decade stand at merely 30.5%.
Canada’s second Dividend King
After raising its payouts for 51 consecutive years, Fortis (TSX: FTS) has also attained the rank of a Dividend King. It has already been dividend royalty for decades, and it’s among the safest dividend stocks you can buy in Canada. With a market capitalization of $31 billion, decades of history, millions of customers (both electricity and natural gas), ten different operations, and a massive asset base, it’s also one of the most stable blue-chip stocks in Canada.
From a yield perspective alone, Fortis is far less attractive than Canadian Utilities right now. It’s offering dividends at a yield of around 3.9%. However, it far outstrips the overall returns of other utility companies. The stock has grown 55% in the last decade, barely enough to stay ahead of inflation but still far better than Canadian Utilities. More importantly, it has pushed the overall returns to 127%.
Foolish takeaway
Whether you are retirement planning or simply investing for a passive income stream, it’s important to look beyond merely the dividend side of a stock, even if you are buying it primarily for dividends. Looking at the overall return potential can help you make a better, more informed decision regarding your dividend picks.
