The Toronto Stock Exchange boasts some of the most reliable dividend kings, which not only pay assured, regular dividends but also grow them faster than inflation. There are stocks for all types of income needs. If you want to start relying on passive dividend income immediately, there are high-yield stocks, especially in the real estate space, such as Smart Centres REIT, that can give you above 8% annually. And if you want to invest a small amount every month or every week over a long period, and build a nest egg, there are dividend growth stocks.
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My top dividend stock pick to build a nest egg
Among the dividend growth stocks, Canadian Natural Resources (TSX: CNQ) is my top pick to build a dividend nest egg. You can buy the stock for under $50. Even when you don’t have much to invest, a $50 investment can keep you going.
Investing is all about building a habit. goeasy has a better dividend growth rate of over 20% compared to Canadian Natural Resources’ (CNRL) 10%. However, goeasy’s stock price of $150–$200 could make one think twice before buying. It is also more prone to interest rate decisions and may fall significantly in an economic crisis. The 2008 Great Recession saw goeasy pause its dividend growth, although that was also a very commendable job considering the biggest of the U.S. lenders collapsed in that crisis.
Even if you decide to invest $300 every month in the dividend nest egg, there would be months when you won’t have that money. If missing your investments once, then twice, and the frequency grows, your investment will take a back seat.
However, if for any reason a $300 investment is not possible, you can buy just one share of CNRL to keep the cycle going. After a year or two, you can probably use the dividend money to buy more shares of CNRL over and above the investment from your pocket.
Investing in one’s strengths while building a nest egg
If you are looking to build a nest egg, you should look at one’s strength. Each economy has its own strengths, and Canada’s is its oil sands fields, which are among the largest in the world. CNRL, with its low-cost, low-maintenance reserves, has a cost advantage over its peers. This advantage has helped the company grow dividends even in the 2014 oil crisis, when the United States, Canada’s largest oil consumer, witnessed a shale oil boom and crashed the oil price from US$100/barrel to a new normal of US$60/barrel.
CNRL acquires reserves, and extracts and processes oil and natural gas. The energy producer determines its production mix according to the WTI crude price. Its breakeven cost after adding maintenance and dividends is mid $40/barrel, which means it can comfortably pay and grow dividends when WTI is US$60.
The company also keeps its net debt below US$12 billion as it can manage the cost of that debt even when oil prices are weak.
When the net debt crosses this threshold, CNRL accelerates debt repayment by allocating 40% of its free cash flow towards debt repayment. It allocates capital between dividend payments and share buybacks, which helps it pay a higher dividend every year.
Its dividend model’s resilience is visible from the 25-year dividend growth history. Its slowest dividend growth was of 2.2% during the 2014–2016 oil crisis, and the fastest growth was 130% in the 2022 oil price rally to US$125/barrel.
Investor takeaway
While there are many dividend stocks to choose from, you should look at your investment needs, too. Consider investing in stocks that are not only fundamentally strong but also the ones you won’t hesitate to invest in.
