Are you looking to get started with dividend investing?
If so, you’ve made a wise choice. If held in tax-sheltered accounts, dividend stocks (especially those with long-term track records of dividend growth) tend to perform quite well. The Dividend Aristocrats – stocks that have a minimum of 25 years of dividend increases under their belt – have outperformed the S&P 500 since their inception in 1990. This feat is especially impressive when you consider the fact that the aristocrats have been less volatile than the index over that timeframe. In other words, they have produced superior risk-adjusted returns – the Holy Grail of investing.
Nevertheless, dividend investing isn’t without its risks. Some investors chase high yield without considering dividend sustainability. Still others buy high yield funds that use questionable forms of return-limiting “yield enhancement,” such as covered call writing. There are many risks to keep in mind. In this article, I will share two relatively safe dividend stocks to get you started on your dividend investing journey.
Alimentation Couche-Tard
Alimentation Couche-Tard (TSX:ATD), best known for its Circle K gas station chain, is one of Canada’s most successful retail companies. Circle K, as you probably know, sells gas and miscellaneous convenience store-type products (food, cigarettes, lotto) all across Canada. The company also operates gas stations in the U.S. and Europe.
Why do I consider Alimentation Couche-Tard a good value today?
There are two main reasons, one of which is a long-term characteristic of the company, while the other pertains to today’s macroeconomic climate.
First, the long-term characteristic: fiscal responsibility. Alimentation Couche-Tard’s management has expanded aggressively over the years, but hasn’t borrowed heavily to do it. Despite buying Circle K a few decades back, expanding it to practically every corner of Canada in just 10 years, and doing further expansion in Europe, ATD has a mere 1.1 debt-to-equity ratio.
How did ATD’s management pull this off? Simple: through retained earnings! Instead of paying out a vast amount of dividends, it pays only a moderate amount of dividends, leaving it with more money to reinvest in the business. Whereas a lesser company would crank out dividends by the truckload, forcing it to borrow heavily to finance growth, ATD has kept its dividends within reason and therefore grown more cheaply. The end result has been high growth AND a clean balance sheet.
A second reason you might wish to invest in ATD is because it’s a gas station company, and oil prices are rising right now. Unlike oil companies, though, ATD isn’t a “pure play” energy vendor, it sells a lot of other things too, so it doesn’t collapse like a house of cards when oil prices fall. None other than Warren Buffett thinks that oil prices will be relatively high in the near future, so the strength of oil is a factor worth considering.
TD Bank
The Toronto-Dominion Bank (TSX:TD) is one of Canada’s biggest banks. It sports a 5% dividend yield and trades at just 10 times earnings. The reason why TD is so cheap is because its earnings in 2023 were fairly lousy, held back by a number of one-time charges related to its failed First Horizon acquisition. Those charges held back earnings, but on the flip side, TD offered too much for First Horizon in the first place, so the regulators who canned the deal really did shareholders a favour. Royal Bank recently concluded buying HSBC Canada, for which it paid a princely 19 times earnings. Royal Bank’s earnings are probably going to include a number of acquisition charges related to that deal in 2024. TD’s M&A fiasco is in the past, so it will probably report higher earnings in the year ahead.
