Earning capital growth and dividend income is a great way to maximize overall returns in a stock portfolio. Many of the most successful stocks in Canada have paid growing dividends.
Their dividend yields tend to be lower than typical “dividend stocks” because they prefer to re-invest a large portion of their cash flows into growth opportunities (and not just into dividends).
As earnings increase so too do dividends. Earnings growth tends to help support a solid market multiple. Consequently, you get the double benefit of the stock rising and the dividend per share also rising.
If you had $15,000 to distribute between three quality TSX stocks, here are three to buy for growth and income.
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goeasy: A high risk, high reward stock
For the first $5,000, I would consider looking at goeasy (TSX: GSY). After a 17% decline in the stock over the past year, it is starting to look attractive. Now, keep in mind this is a bit of a higher risk, higher reward opportunity.
goeasy is Canada’s largest non-prime consumer lender. This is a risky segment given the low credit rating of its customers. However, it counteracts that risk with elevated interest rates and prudent underwriting. With many big banks tightening their lending policies, higher quality consumers are ending up as customers of goeasy.
Certainly, economic concerns may make goeasy vulnerable. However, past recessions have demonstrated that goeasy can be resilient through tough economic times.
Investors need to be comfortable with that risk. If they are, the stock is very cheap at less than nine times earnings. Given that goeasy could grow earnings by almost twice that rate, it looks interesting. This stock yields a 4% dividend and has a record of growing that dividend by a high teens rate.
Secure Waste: This company is way better than the market knows
Another stock to buy with $5,000 is Secure Waste Infrastructure Services (TSX: SES). Like goeasy, you might need to be a contrarian with this stock.
Secure is one of the largest waste disposal providers for the energy patch in Western Canada. Even though energy prices have declined, energy companies have well liabilities and waste that needs to be cleaned/disposed of. Secure operates a near monopoly in the regions it operates in.
The market still treats Secure like a volatile energy services provider. Yet nearly 80% of its business is contracted or recurring.
The company has a strong balance sheet and pays a 3% dividend. It has been aggressively buying back stock. Last year, it bought back nearly 25% of the company. This year it could buy back 8% of its shares. After the recent 23% decline, this is a very cheap stock.
Alimentation Couche-Tard: A retail stock to hold through the turmoil
Another stock to buy with $5,000 for income and growth is Alimentation Couche-Tard (TSX: ATD). Like the others above, this stock has not been exempted from the recent market plight. Its stock is down 13% this year.
Couche-Tard operates one of the premium convenience store networks around the world. Convenience stores provide essential goods and services like food and fuel. Consequently, it is a stable business. It can supplement its growth by using its strong cash generation to make smart acquisitions.
Right now, it is working to take control of a massive competitor, 7-11. Whether that happens or not, Couche-Tard is an excellent operator with a strong brand and great services.
It pays a 1.1% dividend. However, it has a great record of increasing that dividend by a double-digit rate. ATD stock could be a nice buy today.
