The U.S. market has been led by the bull for pretty much 10 consecutive years. So, it’s better to take a more defensive stance to prepare for attacks from the bear. A core component of a defensive portfolio is it can utilize conservative dividend stocks as its foundation.
Here are some tips for choosing your foundation conservative dividend stocks.
Earnings or Cash Flow Stability
Healthy dividends are paid from earnings or cash flow. So, stable earnings or cash flow generation improve the dividend safety of a stock.
Typically, utilities, REITs, the big Canadian banks, the big Canadian telecoms, and energy infrastructure stocks are good places to search for businesses that generate stable earnings or cash flow.
When checking for dividend safety, the first 2 things to look at are the payout ratio and dividend track record of the company. Typically, the lower the payout ratio, the safer the dividend.
However, certain industries like REITs and utilities tend to have higher payout ratios. So, it’s best to compare a company’s payout ratio to that of its industry peers.
There are many ways to get to a $100,000 Tax-Free Savings Account (TFSA). The way I’m about to discuss is a simple method with below-average risk, which should help you avoid common TFSA mistakes.
Before I get to what to invest in your TFSA, here’s the general idea.
The gist of our strategy to get to a $100,000 TFSA
Firstly, the TFSA is a savings tool before it’s an investment tool. So, you’ve got to put money in regularly to get your TFSA growing.
Secondly, because we can’t use capital losses to offset capital gains in TFSAs, we’re going to take reduced risk in the account. Specifically, we aim to buy quality stocks that have durable profitability — but only when they’re trading at fair or better valuations.
Thirdly, we want to hold largely proven dividend-growth stocks that offer decent dividend yields of 3-5% (at least initially). This is because we’re pretty late in a bull market (more than 10 years in since the low of the last market crash).
The defensive stance will give us a positive return from decent dividends even in a market downturn. The extra capital from the dividends can be reinvested for more shares at such a time.
Fourthly, we’re aiming for long-term returns of 10% per year, which is very reasonable for blue-chip dividend-growth stocks that offer yields in the range of 3-5%.
Brookfield Renewable Partners LP (TSX:BEP.UN)(NYSE:BEP) just increased its cash distribution by 5.1% to an annualized payout of US$2.06 per unit. That implies a yield of 7% at US$29.29 per unit.
A Sustainable Dividend
In 2018, it increased its funds from operations (“FFO”) per unit by nearly 14%, resulting in a payout ratio of <91% for the year, which was a meaningful improvement from 2017’s payout ratio of 98%. The lower payout ratio makes a safer dividend.
Management aims for cash distribution growth of 5-9% per year in the stock. It’s conservative to assume a cash distribution growth rate of 5% because, since 2011, its distribution has compounded at a growth rate of 5.4%.