Canadian investors, take note: A dividend’s potential for growth is more important than its current yield. Learn why and get two ideas about TSX stocks with growing dividends to buy now.
Prefer to read? There’s a transcript below.
Transcript
Nick Sciple: I’m Motley Fool Canada senior analyst Nick Sciple, and this is the “Five-Minute Major,” here to make you a smarter investor in about five minutes.
Today we’re discussing dividend growth investing. We’ll discuss why — for long term investors, at least — dividend growth is more important than the starting dividend yield, and we’ll close with two Canadian dividend growth stocks to consider if you’re looking for passive income. My guest today is Motley Fool Canada Chief Investment Officer Iain Butler. Iain, thanks for joining me once again.
Iain Butler: Great to be back, Nick, [after a] couple of weeks away. We’re good to roll.
Why is dividend growth important?
Nick: So talking about dividend growth stocks today, when you’re looking at dividend stocks, many investors, especially beginners, look at that starting yield and stop the analysis right there. Why is it important for folks to focus on dividend growth?
Iain: I think you used the key word in the intro: “long-term” investing. Indeed, over long periods of time, studies show (I’m talking decades here) that companies that consistently grow their dividends generate higher total returns with less volatility than companies that maintain static dividends, cut their dividends, or pay no dividends at all. And when you think about it a little bit, logic flows. That dividend growth is actually a sign of a healthy, growing company with rising earnings, businesses with pricing power, strong balance sheets, discipline, management, and traits you just don’t find in companies that are either struggling to pay a dividend or cutting their dividend.
Are high-yield stocks good buys?
It’s important to realize, too, that people see that initial yield and they get excited when you see 6, 7, 8% on a stock.
But in fact, a stock yielding 3% but growing its dividend 10% annually, for example, you’re going to double your income over in just over seven years with that situation rather than just maintaining that 6% or 7% yield with a company that doesn’t increase its dividend.
It’s very important to realize that the market is sending a signal when it puts a high yield. When you’re looking at a high-yielding stock, it’s a signal to, in fact, stay away. It shouldn’t be a company that you’re attracted to. It should actually be one that you stay away from in most cases.
Dividend growth stocks Canadian investors can buy now
Nick: With that in mind, what’s one Canadian dividend growth stock, or a pair, that looks attractive to you right now? And why?
Iain: We’re going to go [with] two. These two companies offer somewhat of a best of both worlds situations. They currently offer a pretty attractive current yield, and they’ve got a long history of dividend growth. These two companies live within the mighty Brookfield empire, and we’re going to start with Brookfield Infrastructure (TSX: BIP.UN).
Brookfield Infrastructure is a leading global infrastructure company that owns and operates a high-quality portfolio of regulated assets and long life contracted businesses. So it’s got a portfolio that’s filled with utilities, transport like toll roads, midstream energy assets, and data centres across North and South America, Europe and Asia Pacific. So across the world a vast portfolio, and the company currently offers a dividend yield of 5.2%.
More importantly, though, it’s grown its dividend at a 6.3% average annual rate over the past decade or so. This has resulted in a 218% total return over that decade or so, and that handily beats the S&P TSX Composite total return of about 155%.
The other company that we’ll mention here is Brookfield Renewable (TSX: BEP.UN). So a cousin of sorts to Brookfield Infrastructure, but very different assets within Brookfield Renewable, as the name suggests. It’s one of the world’s largest public owners and operators of renewable power and decarbonization solutions
We’re talking hydroelectric, wind, solar and storage facilities that span across five continents. Similarly, the current yield for Brookfield Renewable is 5.9%, and the company’s dividend has grown at an annual rate of 3% on average over the past decade. So about half of Brookfield Infrastructure, but its total return is quite similar, at 220%. It’s another one that’s handily beaten the S&P TSX Composite, and just an interesting smattering of assets across both of them to put in one’s portfolio. All very important critical assets, and it’s just an easy way to blanket a vast array of renewable and infrastructure assets with two simple holdings.
Nick: One other thing to mention as well: With both of these companies, often their contracts for these types of important infrastructure are indexed to inflation. And so the payments they’re getting from their customers are going to increase in line with this high inflation environment we’ve seen, which helps support that growing dividend over time. Two great companies, if you’re looking to buy today, but also to hold for years and years on into the future. Iain, thanks so much for joining me for this edition of the Five-Minute Major. Hope to see you next time.
Iain: Awesome. Nick. Thanks.
