A 3.5% dividend yield might not seem like all that much to write home about, especially in an environment where 5-6% yields still exist. Any way you look at it, though, we’re in an up market and, with that, there’s bound to be a bit more yield compression.
Even with dividend increases considered, a rapidly rising market tends to pave the way for lower dividend yields. And while that might be discouraging for new passive income investors looking to put fresh money to work, I think that there’s no shame in settling for a yield that’s at or even a few basis points below 4%.
At the end of the day, you’ll either continue to benefit from appreciation after you’ve hit the buy button, or shares will reverse lower, and you’ll have an opportunity to get more yield for a lower price. In my view, incremental buying seems perfect for this climate. That way, you have skin in the game, but you also won’t kick yourself if stocks move lower and yields start creeping higher after all the yield compression we’ve witnessed across the board in the past two years.
For the most part, dividend growth and appreciation could be the name of the game. And, in my humble opinion, that makes dividend growth investing more rewarding than income investing with a focus on the upfront yield. When it comes to dividend growth, it’s more about how large that dividend and your yield based on invested principal can grow over the span of many years.
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Canadian Tire
When it comes to a retailer like Canadian Tire (TSX:CTC.A), which has a well-covered payout with room to grow, I do like the road ahead, even if the Canadian consumer isn’t in a spend-heavy state right now, given lingering inflation, muted employment, and, perhaps most concerning, the potential AI impact on jobs over the next three to five years as companies look to start automating various junior white-collar roles.
In a way, it feels like the corporate ladder is already being lifted. And while that could cause more Canadian consumers to hold back on discretionary purchases while socking more money away for a rainy day, I still think that Canadian Tire is a discretionary company that can do well in a climate that’s not at all sanguine.
In a prior piece, I highlighted Canadian Tire’s strong homegrown brands, which now include Hudson’s Bay Company (HBC), as well as its decent value proposition. Indeed, you don’t need to break the bank by shopping at the local Canadian Tire. In fact, some of the private labels and exclusive brands are quite competitive (think sports goods and consumables).
A durable dividend-growth rockstar in the making?
Of course, Canadian Tire is far from a consumer staple, but at the same time, the firm is doing so many things right at the operating level. Perhaps there’s no mystery as to why shares have gained nearly 16% year-to-date despite question marks surrounding the consumer. With high-margin brands in the portfolio (the legendary HBC is perhaps its strongest), a booming Triangle loyalty program, and a growing mix of essentials, my guess is that Canadian Tire is a more resilient beast for sideways economies.
At 13.8 times forward price to earnings, the $10.6 billion Canadian icon is just underestimated and too cheap to pass up, whether you’re in it for the growing dividend or the upside to be had if Canadian consumers feel better about spending again, perhaps once inflation plunges, tariff worries dissipate, and the economy has a chance to heat up.
