Canada offers a diverse range of dividend stocks to choose from. However, just because a stock has a high dividend yield doesn’t mean it is a good investment. High-yielding dividend stocks (those with a yield of 7% or higher) tend to have reasons for their high yield.
It might be poor business fundamentals, a bad balance sheet, or declining cash flows. An elevated dividend yield is one way the market prices risk. Consequently, high-yielding dividend stocks are best avoided. Your returns aren’t likely to outpace inflation if the stock rapidly declines and a high dividend gets cut in half (or altogether).
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Look for quality stocks with a modest dividend over high-dividend-yielding stocks
The better approach is to look for good-quality businesses that also generate modest dividends. A great hallmark of a good dividend stock is one that has prudently grown its dividend over years or decades (even better).
A company that consistently grows earnings per share is likely to grow its dividend at a similar rate. As earnings per share rise, so should the shares and so should your income. Likewise, look for low, stable payout ratios. It just means a company can invest in growing its business and still afford to pay a dividend.
If you are looking for some Canadian dividend stocks to outpace inflation, here are two to contemplate buying for long-term income and growth.
AltaGas: A top utility stock to beat inflation
AltaGas (TSX: ALA) was once one of those high dividend companies. In 2018, its yield hit 16% just before it cut its dividend in half. The company got caught with too much debt when energy prices took a major downturn, and the stock (and dividend) plunged.
The great news is that the company is a completely different business today. AltaGas has executed a great turnaround to divest non-core assets, pay down debt, and focus on its core competencies. Its stock is up 147% in the past five years!
AltaGas now operates a highly resilient natural gas utility in the U.S. and a diversified gas infrastructure business in Western Canada. Both these businesses are expected to grow faster than inflation by three to four times.
With the business drastically de-risked, AltaGas has resumed a dividend-growth posture. It has increased its dividend every year since 2021. It expects to grow its dividend by 5-7% annually for the coming five years.
Right now, AltaGas yields 3%. However, you will effectively double your yield in 10 years if it maintains its dividend-growth rate.
National Bank: A top bank stock for dividends and growth
Another dividend stock that should strongly outpace inflation is National Bank of Canada (TSX: NA). This is not the largest or the most well-known bank in Canada. However, it has focused on niches where it prospers and has effectively carved a very strong market.
National Bank just acquired Canadian Western Bank. That gives it a major foothold in the Western Canadian market. In many ways, this market is unique from the rest of Canada, just like the Quebec market.
As a result, National could be very effective using its operating prowess to improve earnings, unlock synergies, and expand its market share from bigger players.
It has been the best-performing bank stock in Canada for the past decade. Today, it has a modest 3.2% dividend yield. However, it has grown its dividend by an 8.6% compounded annual growth rate (CAGR) over the past 10 years and an 8% CAGR over the past 20 years!
Look for companies like National Bank and AltaGas, and you should enjoy a strong combination of income and capital returns over time.
