Growth is often associated with tech stocks or those that do not pay dividends. It is fair to assume that a company uses its free cash flow (FCF) to give returns to shareholders by reinvesting in growth/expansion, share buybacks, or dividends. If the company is paying dividends, it has less money to reinvest in growth or for share buybacks. These two Canadian stocks are doing both, reinvesting in the business and also paying dividends, leading to dividend growth.
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The top Canadian stocks to buy for dividend growth
goeasy
goeasy (TSX:GSY) stock surged 50% after bottoming out on April 7 when tariff uncertainty created panic about inflation and unemployment. The world is learning to adjust to tariffs as a new normal, and that is visible from goeasy’s share price ascent.
The subprime lender reported a record $904 million in loan originations, bringing its loan book to $5.1 billion in the second quarter. At this rate, it can easily achieve its 2025 target of gross loan receivables of $5.4 billion to $5.7 billion.
The lender is growing its business by increasing its loan book, which fetches income from interest and loan processing fees. It gives some of this interest income as dividends to shareholders. The bigger the loan portfolio, the higher the dividend amount, helping it grow dividends at a compounded annual growth rate (CAGR) of 30%.
goeasy’s strategy to scale its loan portfolio is by giving more debt at a lower interest rate. It lowers interest rates by improving consumers’ credit scores and shifting them from subprime to prime. This also reduces credit risk on goeasy’s loan portfolio, which is measured as the charge-off rate.
It has set a target for its three performance indicators:
- Maintain debt at less than 4x its adjusted equity
- Keep the net charge-off rate in the 8–10% range
- Ensure return on equity (ROE) is above 20%
In the second quarter, its net charge-off rate fell to 8.8% from 9.3% a year ago, hinting that the quality of the loan portfolio has improved. This means goeasy does not need to set aside higher provisions for default. So it can now allocate more money to provide loans, thereby increasing its ROE to 29.3% from 23.3% a year ago.
Canadian Natural Resources
Canadian Natural Resources (TSX:CNQ) is another good dividend growth stock to consider. It has been growing dividends for the last 24 years at a CAGR of 23%. The company has arrived at an FCF allocation for buybacks and dividends based on the debt levels. This ratio has helped it thrive through the 2014 oil crisis and 2020 pandemic, and even grow dividends.
Canadian Natural Resources uses 60%, 75%, and 100% of its FCF to give returns to shareholders when its debt is over $15 billion, between $12–15 billion, and less than $12 billion, respectively. This ratio ensures more FCF is channelled to repay the debt it took to acquire new oil and gas reserves. The company’s slow-declining, low-maintenance oil and gas reserves give it a cost benefit.
The company produces more oil at mid-US$40/barrel. The 10% tariff on oil exports did have an impact on the price it realized on oil production. However, it adjusts its product mix to high-margin synthetic crude oil to remain profitable and grow FCF.
In the second quarter, the realized prices of oil products fell by 20%, which was offset by increased production and a 60% jump in natural gas prices. The company increased its net debt to $18.7 billion at the end of 2024 as it acquired new reserves that were accretive to its earnings. It plans to reduce the net debt by $2 billion and has so far repaid $1.7 billion. This accelerated deleveraging will help Canadian Natural Resources increase the FCF allocation to shareholder returns from 60% in 2025, enabling it to increase dividends even when oil prices fall.
