When choosing the right dividend stocks for generating passive income, yield is not the only factor you have to take into account, especially if you want the income source to sustain for decades into the future. The dividend sustainability is critical to consider if you want longevity in your dividend income. You are limited to Dividend Aristocrats if you also want your income to stay ahead of inflation.
With all these conditions in mind, there are two stocks that you might consider looking into if you want to start an income stream that can last virtually forever.
A utility stock
Fortis (TSX:FTS) is arguably one of Canada’s most trusted dividend and blue-chip stocks. The two “pillars” of this trust are its dividend history and its business model. As a utility business with about 3.4 million consumers in 10 different regional and international markets and 99% regulated utility assets, it’s quite safe even when compared to other utility stocks.
As for the dividend history, Fortis has been growing its payouts for 49 consecutive years. That’s Canada’s second-longest dividend-growth streak, and Fortis is on track to becoming Canada’s second Dividend King next year. The dividend growth is quite decent, and the payouts are financially sustainable (at least considering its last 10-year payout ratios). The yield is attractive enough at 4.36%.
While this is enough if you want to buy Fortis purely for its dividends, its capital-appreciation potential is another reason to consider adding this utility to your portfolio. It returned 80% to its investors in the last decade via price appreciation, outperforming the market by a significant margin. It’s also quite attractively valued right now.
A renewable energy company
On the other end of the entire utility supply chain spectrum, power generation companies and renewables are dominating this arena right now. Most of the new capital in power generation is moving towards renewables nowadays, from both retail and institutional investors.
In Canada, Brookfield Renewable Partners (TSX:BEP.UN) is among the best large-cap stocks you can buy to gain exposure to renewables and lock in a reliable dividend stream.
Brookfield Renewable Partners’s major strength is the size and diversity of its renewable-based power generation portfolio. The company has an output capacity of about 166 megawatts in operational and under-development projects, and over 40% of it is outside North America. Solar will make up the largest slice of the power output, followed by wind and hydro.
Brookfield Renewable’s dividend history is not as long or as stellar as Fortis’s, but thanks to a solid underlying business, the chances of the company maintaining its dividends for decades to come are quite decent. The stock is also heavily discounted right now, and it has pushed the yield up to 5.4%.
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Foolish takeaway
Even though the primary attraction of these two stocks is their dividends, they may also offer decent capital-appreciation potential. This return “dimension” may even outshine the dividends in the long run, especially if you are planning on holding these stocks for decades to come.
