When you are hunting for dividend stocks, you want to find something that lasts. The best kind of dividend stocks are those you can buy, tuck away, and enjoy a rising stream of income over time.
The worst kind of dividend stocks are those that pay a dividend that they can’t afford. The market is pretty good at sniffing out unsustainable dividends. It usually means a major decline in the stock price, an elevated yield, and then, eventually, a dividend cut.
That is why dividend quality is far more important than quantity. I’d far rather accept a smaller dividend yield that is regularly growing because the broader business is steadily growing. Here’s two dividend stocks that you can buy, tuck away, and feel good about holding over the coming five years.
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A top energy infrastructure stock
The first feel-good dividend stock is AltaGas (TSX: ALA). After a 127% gain in the past five years, AltaGas’s dividend yield has compressed. It only yields 2.7% today. However, the company has gone through an incredible transformation in that timeframe.
The natural gas producer has sold off non-core businesses and focused on its expertise, natural gas. It has deleveraged to where its balance sheet is in strong condition today.
Over 55% of its business comes from a quality regulated natural gas utility in the United States. This segment has ample room to grow its rate base through asset modernization, optimization, and expansion.
The midstream business has substantial levers for growth. Demand for safe, reliable Canadian propane and butane is rising in Asia. AltaGas is expanding its export capacity and becoming a substantial provider to these regions. Demand should only increase given the recent conflicts in the Middle East.
Today, 86% of AltaGas income is from contracted sources. It has a target of 90% contracted income in the future. It has a very modest 50–60% earnings payout ratio target.
AltaGas’ dividend has grown by a 6% compounded annual growth rate (CAGR). Its dividend has grown as its earnings per share has increased. ALA targets a 5-7% CAGR all the way to 2030.
This might not be the most exciting stock. However, it is one company that has a pretty good chance to deliver attractive high single-digit total returns in the years ahead.
A top utility stock with a top dividend record
Another stock I wouldn’t hesitate holding for the coming five years is Fortis (TSX: FTS). This is the ultimate stock to hold in times of uncertainty. Given rising geopolitical tensions, there is likely to be no shortage of uncertainty in the coming five years.
In times of uncertainty, investors seem to flock to Fortis. That is why it is likely up 11% this year. Its yield has compressed to 3.2%.
Fortis has a very impressive portfolio of regulated transmission and distribution utilities in North America. Its operations are diversified and provide a rounded mix of stable returns year after year.
The company can promise a 7% compounded annual rate base growth for the coming five years. Investors are very likely to see that achieved. FTS does what it promises.
Fortis has increased its dividend for 52 consecutive years. It continues to believe that dividend can grow by 4–6% per year. For a low-risk stock with a decent growth profile, Fortis is one of the best to hold for the long term.
