Canada is a great place to look for stocks that generate passive income. Canada has a disproportionate amount of dividend stocks available for investors to buy. While this is an attractive component of the market, investors do have to be wary.
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For reliable passive income, choose quality dividend stocks over high dividend stocks
Stocks with overtly high dividend yields can be a trap. There is generally a bad reason for a stock trading with a dividend yield that is over 7%. It might be too much debt, weakening demand for its products, poor management decisions, or a dividend that is not sustained by profits/cash flows.
I prefer to find stocks that steadily increase their dividend at the same pace as their earnings grow. These stocks tend to be more resilient and offer a steadier mix of total returns for investors. If you want decades of passive income you can rely on, these are two high-end dividend-paying stocks I would be content to own for the long term.
Canadian Natural Resources: A top stock for passive income
Canadian Natural Resources (TSX: CNQ) has raised its dividend for 26 consecutive years! That dividend has compounded by a 20% compounded annual growth rate (CAGR)! This is the type of dividend stock you want to own for decades of passive income.
It is a long-term-thinking company where decisions are made in the best interests of building long-term shareholder value. The past few years are a great example. It could have delivered almost all its excess cash to shareholders. However, it saw opportunities to massively consolidate its oil sands and thermal operations across Western Canada. It made some great acquisitions for the long term.
It grew its asset base to nearly 1.6 billion barrels of oil equivalent per day. Canadian Natural has decades of energy reserves at flat production and capex rates. This company will be generating significant cash and serious dividends for decades. That is why it is an ideal buy-and-hold stock for passive income.
Canadian Natural stock yields 3.75% today. Its stock has delivered a big 43% return so far this year. Certainly, a recent rise in oil prices has been a major reason for this rise. This passive income stock is a little pricey. However, it can be volatile, so you will likely get a better chance to add later in the year.
Royal Bank: The best of the banks
Royal Bank of Canada (TSX: RY) is another lifetime stock for passive income. With a market cap of $313 billion, not only is it Canada’s biggest bank (and biggest stock), but it is also probably one of its best banks.
In recent years, many of Royal’s peers have had financial and operational missteps by investing in diversification and new geographies. Royal has stuck to its strengths: commercial and retail banking, wealth management, and capital markets. It has profited from peer mistakes by taking market share in Canada.
Royal has a strong balance sheet and ample capital to continue fueling growth. It just increased its dividend 4%. It has been paying a dividend since 1973. Its dividend has risen by a 7% CAGR over the past 10 years. Royal Bank stock yields 2.93%.
Today, Royal stock is up 43% over the past year. Like Canadian Natural Resources, being the best does come at a cost. Royal’s stock trades at a premium. If you are starting a new position, you may want to dollar-cost-average or wait for a broader pullback to enter the stock.
