It seems like just yesterday we were all in university, bright-eyed 18-year-olds with our whole lives and dreams ahead of us. Suddenly, though, the dreams of retirement are quickly becoming reality, and we might not be financially ready to cope with the realities.
That’s where investing can certainly be a benefit. Not only can you receive income through dividends, but growth as well. So today, we’re going to look at three TSX stocks to quell those retirement fears.
EMA
Let’s first get right into the TSX stocks. Today, I’d consider Emera (TSX:EMA) a top option. This dividend stock offers an opportunity to invest right away for an attractive 4.5% dividend yield at writing. Management also targets a 5% to 7% increase in earnings per share (EPS) growth, deploying huge capital into utilities to create regulated returns.
What investors will want to watch are a few things. First, the payout ratio is quite high at 98%, and leveraged free cash flow (FCF) is down $2 billion. The total debt is also large at $20.2 billion. All together, it could mean that dividends are near reported earnings and the payout ratio could be under pressure.
That being said, its yield and regulated earnings still make Emera an attractive buy for income and steady growth. However, its high payout ratio and heavy debt means the payout could be trimmed if earnings weaken. So treat it as a yield tilt rather than a solid core investment.
H
Next we have Hydro One (TSX:H), another regulated option in the utility sector. The dividend stock offers a lower dividend with a forward yield at 2.7% as of writing, though with a conservative payout ratio at 61%. The dividend stock also operates strong cash flow at $2.4 billion, with steady rate-regulated revenue from its Ontario transmission and distribution business.
There are items to watch here as well for retirement income. The hydro producer has a heavy capital expenditure program, as well as higher long-term debt at $18.2 billion and negative leveraged FCF at $1.2 billion. However, the dividend sustainability looks reasonable today because of the regulated environment.
If you’re looking for a more conservative dividend profile and stronger cash flow, then this is a solid core utility hold for retirement income. Just watch that capital spending.
FSV
Finally we have FirstService (TSX:FSV), which honestly is more of a long-term growth instead of a dividend play, given its low dividend at about 0.5%. The payout ratio is low however at 34%, so that dividend is certainly secure.
And overall, the stock is doing quite well. It demonstrated strong revenue during recent earnings, with adjusted EPS growth and positive leveraged FCF of $207 million. These improving margins are great for capital appreciation and future dividend growth. Investors will want to watch its business to make sure more growth is on the way, especially given the dividend is so low.
However, this is a strong growth and total return holding in a retirement portfolio. So while certainly not a primary dividend income source, it complements the others.
Putting it together
Now, let’s look at how to make this work together. For income reliability, I’d go with Hydro One, especially given that utilities give inflation protection through rate cases. However, I’d still have a place for Emera, especially as it has more U.S. exposure, providing diversification outside of Ontario. Then, of course, go with FirstService for some serious growth.
When adding it all together, consider limiting single-company exposure to a modest percentage of your portfolio. Monitors metrics, and watch capital spending. Also, consider tax-efficient investments, specifically the Tax-Free Savings Account (TFSA) to reduce that drag in income.
A practical allocation might be to create core income from Hydro One, so about 30% to 40% of allocated income. Then for a yield tilt, put 20% to 30% of that investment towards Emera. Finally, for that growth, perhaps 10% to 20% in FirstService for long-term capital growth.
Bottom line
These three dividend stocks can certainly help boost your retirement income, especially if you have some cash set aside for a long-term investment. Hydro One provides a conservative choice, Emera a boosted yield, and FirstService some growth. However, make sure your investments are anchored to a core choice discussed with your financial advisor.
