Earning passive income by investing in stocks has been a popular investing strategy for many Canadians. Stocks are liquid and easy to trade, which makes them attractive alternatives to other income-generating assets like real estate, franchises, or small business investments.
Yet, many Canadians look for high-yielding stocks that pay big dividends but have little capital to invest in growth. In a low interest rate environment, this strategy provided attractive returns. However, it stopped working when the debt-heavy, high-yielding stocks started to see their cash flows rapidly decline.
I prefer to buy stocks that pay a lower dividend yield but still have some cash left over to reinvest in growing the business. The modest dividend forces the company to prudently manage its capital. Yet, it’s not paying too much dividend income that it can’t reinvest to grow the long-term earnings of its business.
If you are wondering how to invest for a modest income and still see capital growth, here’s a three-stock mini-portfolio that I would buy with $30,000.
A railroad stock with a small but growing stream of dividend income
With a market cap of $102 billion, Canadian Pacific Kansas City (TSX:CP) is one of Canada’s great blue-chip stocks. The company is a leader in the North American transport industry. It has a network that extends across Canada, the United States, and Mexico.
CP has always been an efficient and profitable railroad operator. It is taking its expertise to the Kansas City Southern network. It has already unlocked considerable synergies. The combined network is providing above-average growth opportunities for CP as well.
CP yields 0.83% right now. If it can hit its mid-teens earnings growth targets, there could still be more growth in capital and income for shareholders.
A bank stock with a strong dividend growth record
Another stock I’d buy with a $10,000 position is National Bank of Canada (TSX:NA). While it is one of the least talked about Big Six Canadian banks, it has delivered the best performance of the bunch.
Its stock is up 177% in the past five years and 354% in the past 10 years. National has carved a very successful niche in the Quebec market. It has been able to deliver very strong results in its wealth management and financial markets divisions. It just acquired Canadian Western Bank, which could offer a new leg of growth and profits.
National Bank yields 3.5% today. It has grown that dividend by an 8.6% compound annual growth rate (CAGR). It’s a nice play on income and growth for the next five to 10 years ahead.
A waste infrastructure stock for income, growth, and value
Secure Waste Infrastructure (TSX:SES) might be one of the most misunderstood stocks on the TSX. This stock used to be a cyclical energy services company. Today, it has become a crucial provider of waste services, metal recycling, and energy infrastructure in Western Canada.
Over 80% of its business is contracted or recurring. In many regions, it is the only licensed provider of waste services. Its business is much more resilient than the market recognizes.
The company believes it can grow earnings by a high single-digit rate (faster than the industry). Given the stock is cheap (especially compared to peers), Secure has been aggressively buying back stock. It bought back almost 20% of its stock last year.
Secure stock yields 2.6% today. For a mix of income, growth, and value, Secure is an attractive stock to buy today.
