Not all Canadian dividend stocks are equal. There are those with outsized dividend yields (like in the 7-10% range). While these can appear attractive for the near-term income returns, there is often a reason their dividend yield is substantial.
It can be a substantial debt burden, declining product demand, or an increase in competition that is forcing the stock down and the yield up. Unless you have a special scoop as to why the business can turn around, these stocks are best avoided.
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Telus is the perfect example of a dividend stock to avoid
Telus (TSX: T) is a great example of this. The company overspent on its infrastructure plan to find out that elevated competition had reduced returns on those investments. The company’s elevated debt levels made its dividend unsustainable.
Even after a 50% dividend cut, the market remains skeptical about its business going forward. Increased competition continues to put pressure on margins. Its stock is down 40% in the past year and 52% in the past five years. This is the kind of situation you want to avoid.
It’s better to own Canadian stocks with modest dividend yields, but ones that are sustainable and growing. The best businesses grow their dividend as their earnings and cash flow streams grow.
With these Canadian stocks, you get a dividend stream that compounds over time. You also get to enjoy stock appreciation as these companies steadily increase earnings.
AltaGas: Multiple tailwinds for growth
AltaGas (TSX: ALA) is a very well-positioned stock for years of dividend growth. Its U.S. utility business is growing by a high-single-digit rate fuelled by data centre demand and rising connections. Its midstream business is becoming an energy export juggernaut. Huge demand in Asia is providing a strong pricing and volume tailwind for liquefied petroleum gases (LPG) in the coming years.
AltaGas has grown earnings per share by a 19% compounded annual growth rate (CAGR) in the past five years. Its dividend has risen by a 6% CAGR in that time. The company has been able to de-lever to where its balance sheet is in a very strong position.
It only yields 2.6% today. However, it anticipates growing its dividend by a 5-7% CAGR in the coming years. Its stock is up 107% in the past five years.
Canadian Natural Resources: A long-term dividend stock
Canadian Natural Resources (TSX: CNQ) is a Canadian behemoth in the energy sector. Last quarter, it produced just under 1.25 million barrels of oil equivalent per day! While being the largest energy producer, it also happens to be one of the best.
The company can sustain operations and its dividend at as low as $40 per barrel. With 30 years of proven reserves, it can sustain strong cash generation for decades.
With energy prices elevated around the $80 per barrel range, it is pumping out cash flow. Earnings per share have risen by an 11% CAGR in the past five years. Its share count has dropped by a 2.5% CAGR in that time as the company continues progressive share buybacks.
Dividends per share have risen by a 21% CAGR since 2021. The company has a 25-year history of consecutively increasing its dividend. Its stock is up 248% in that time.
Canadian Natural Resources stock only yields 3.5%. It is perhaps not the cheapest stock today. However, it has a great track record of rewarding shareholders (both in terms of income and capital growth). This is the best type of dividend stock you want to own for the long term.
