When investing in dividend stocks, a common question in every investor’s mind is should I go for a higher yield of 6–8%, dividend growth of 5–10%, or a stable dividend. Now, each of these stocks has a tradeoff.
- A higher yield comes with a trade-off of low or no dividend growth. It is good if you want an immediate payout. However, invest with caution when the yield crosses 8%, as there could be a high risk of a dividend cut.
- Higher dividend growth comes with a trade-off of a low dividend yield. It is good if you want a higher payout 7 to 10 years down the line.
- A stable dividend stock acts like a hedge that assures you that this is the amount you will get. Even the stable dividend has risk, but it is low.
What you seek will determine the right dividend stock. Many investors use a mix of all three to build a robust passive income portfolio.
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A reliable dividend stock worth putting $20,000 into
One should understand that a dividend is a company sharing its profits with shareholders. These profits are what is left after they reinvest capital in the business, service their debt, and meet all operating expenses. No matter which dividend stock you choose – high yield, high growth, or stable – ensure that the dividend source is reliable and the company can keep sharing profits for years to come.
If you are looking to invest $20,000 in one go in a single dividend stock, consider Cogeco Communications (TSX: CCA). This company is not a telecom giant, but a beneficiary of the mobile virtual network operator (MVNO) model. It is trading closer to its 52-week low, which has inflated its dividend yield to 6.1%. Moreover, the company has been growing its dividend in the 8–10% range every year in 15 of the last 16 years.
Cogeco meets both your needs of high yield and dividend growth and stability for 13 years.
Now, for reliability, Cogeco’s dividend source is subscription money. It has been providing broadband and TV services. Two years back, it started offering wireless services. Unlike BCE and Telus, Cogeco doesn’t spend a significant portion of its revenue on building fibre infrastructure. Instead, it leases the fibre infrastructure from BCE and Telus and competes on price. This asset-light business model lowers its capital spending needs, leaving more cash for dividends.
Cogeco is currently paying out 30% of its free cash flow as dividends, which proves that its dividends are reliable. The low payout ratio gives the company ample flexibility to continue paying and growing dividends despite a marginal decline in revenue.
Investing tip to maximize returns from Cogeco
If you invest a lump sum amount of $20,000 today, you can buy 309 shares, which will pay a minimum annual dividend of $1,220. This amount could grow annually by 6–8% if you stay invested in the stock for the long term.
| Stock | Purchase price | Investment Amount | Number of shares purchased | Dividend per share | Annual Dividend Amount |
| CCA | $64.60 | $20,000 | 309 | $3.948 | $1,219.93 |
Cogeco does not offer a dividend reinvestment option. If you don’t need the payout, consider investing this money in growth stocks or other dividend growth stocks like Canadian Natural Resources (TSX: CNQ). Consider investing through a Tax-Free Savings Account or Registered Retirement Savings Plan, as they make dividend reinvestments and portfolio rebalancing tax-efficient.
Like Cogeco, CNQ also does not have high capital expenditure requirements. During an upcycle, Canadian Natural Resources uses surplus cash to buy oil and gas reserves and uses revenue from the output to pay off debt immediately. This capital model has helped it own the largest oil sands reserves in Canada. They are high-output, slow-depleting, low-maintenance reserves. Canadian Natural Resources has not built any new refineries as it requires high capital, and the demand for oil and gas has not grown significantly to justify such high capex.
The efficient capital structure gives it space to grow dividends, which it has been successfully growing for 25 years.
