Investing without a specific financial goal is a gamble. Earning money is a very generic goal. How you earn it depends on your skill, opportunity, risk-taking ability, and your stage of life. A risk-averse person prefers employment over business. If your priority is securing a monthly cash flow for the long term that you can bank upon, look for dividend stocks.
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Dividend stocks for long-term income
If you are closer to retirement and your goal is to substitute your income for a long-term investment, you need to focus on two things:
- Lock in a high yield because the upcoming market environment will make a 6% yield seem like a luxury.
- Lock in higher dividend growth as global economic uncertainties could make volatility the new normal.
If you have ample Tax-Free Savings Account (TFSA) contribution room, consider making bulk investments through it in the following dividend stocks.
TFSA dividend stocks for long-term income
Telus stock
Telus Corporation (TSX: T) is an ideal TFSA dividend stock for its 9.7% dividend yield. The high yield is a result of its share price falling in the last three years. The high yield comes with risk, as the company is paying 112% of its free cash flow as dividends. This means Telus is funding 12% of the dividends from its own pockets, whereas dividends should be paid out from the surplus.
Telus has sustained its dividend per share by paying more than 35% of its dividend in kind through a dividend-reinvestment plan (DRIP). However, these shares are only piling up future dividend payments. Excluding DRIP, its payouts are 73% of its free cash flow, which is within the manageable range of 60–75%.
Telus is in a tight spot with its debt, which is 3.5 times its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). The management is using strategies like cost-cutting, offloading non-core assets, and boosting revenue to reduce its debt. If these strategies do not generate desired outcomes, it has the option to slash dividends by 40%. That could save $1 billion per year, which can go towards debt reduction. While a dividend cut can reduce the yield to 5.8%, even that is a high yield.
A dividend cut could give Telus financial flexibility to accelerate debt repayment and reduce money going into interest payments. Once the debt reduces to a comfortable level of 2.2–2.7 times its adjusted EBITDA, Telus could resume dividend growth.
For investors, Telus’s 9.7% yield could provide good income now, and possible dividend growth in the long term could adjust this income for inflation.
Power Corporation of Canada stock
Power Corporation of Canada (TSX: POW) can satiate the need for high dividend growth. While Telus offers an over 9% yield, Power Corporation offers over 9% dividend growth. POW is not a utility like Telus but earns dividends from its financial holdings in IGM Financial and Great-West Lifeco. Insurance premiums and asset management fees earn it regular cash flows.
Power Corporation is a holding company, so it doesn’t directly carry operational risk. It keeps restructuring and rebalancing its holdings to unlock shareholder value. It has been growing its dividends by 6–10% in the last 12 years.
Like Telus, POW is also exposed to risk. An economic downturn can collapse the entire financial sector. Back in the 2008 Global Financial Crisis, POW paused dividend growth for six years to recover from the fallout. Further, 2021 was a weak year as the pandemic increased insurance claims. At that time, POW grew dividends by only 2.7%.
POW is a stock to own to build up your income alongside economic growth and sustain that level in a crisis.
What’s different about TFSA dividend stocks
Investing in the above two stocks through a TFSA will make your dividends tax-free. They will also not be counted in your taxable income, allowing you to take maximum benefit of the income-sensitive Old Age Security (OAS) pension.
