The TSX 60 Index has surged 52% in the last 10 years, giving a 4.1% compounded annual return. The index barely beat inflation. One reason for the slow growth is the high composition of the energy and financial sectors on the TSX. The two tend to move in the opposite direction. You can invest in some dividend stocks that can beat the index and generate wealth in the long term by increasing your purchasing power.
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Two cash-gushing dividend stocks that can beat the TSX
Whenever it comes to dividends, you often read about the big six banks, the telco trio, or REITs. However, some lesser-known small and mid-cap stocks are emerging as fast-growing dividend payers. These stocks carry some risk but can help you diversify your dividend portfolio and beat the TSX with their dividend growth.
Cogeco Communications
Cogeco Communications (TSX:CCA) is an internet services provider that also offers cable television, radio and television broadcasting, and telephony services in Ontario and Quebec, and in 11 states along the east coast of the United States. The company is investing in infrastructure as it expands into mobile services. Unlike the big three telcos that invest billions in 5G and mobile network infrastructure, Cogeco is relatively new in mobile connectivity.
This $2.2 billion market cap company has been growing its dividend at an average annual rate of 10% over the last 10 years. And despite such high growth, it is paying only 33% of its free cash flow as dividends, using 25% towards network expansion and some towards share buybacks.
The company managed to maintain a high dividend growth rate because of its 52%-plus adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). It expects to continue growing its dividend at this rate as it expands its infrastructure and adds more households. The major risk with Cogeco is its high leverage and 5.7% average cost of debt. However, no major maturities are due until 2029, giving the company time to expand and restructure its debt.
Capital Power
Capital Power (TSX:CPX) develops, acquires, and operates power plants. It earns revenue by selling power and from management fees for operating power plants for other companies. It uses 53% of its operating cash flow to pay dividends to shareholders and has been growing its dividends at an average annual rate of 6.9% in the last 10 years.
The 53% ratio shows that it has scope to grow dividends but it is using that money to reinvest in the business and grow its operating cash flow. The company’s earnings could be affected by power outages or a decline in energy prices. However, it will never face any slowdown in demand as the world moves to the digital revolution and electric vehicles.
How can the above two stocks beat the TSX
Compared to the 4% average annual return of the TSX,
- Cogeco can give you a 6.5% annual return through dividends and grow this by 10% annually.
- Capital Power can give you 6% annual dividends and grow it by 6-7% annually.
| Total Dividend on 380 shares | YoY Growth | Capital Power’s dividend per share | Year | Cogeco’s dividend per share | YoY Growth | Total Dividend on 207 shares |
| $934.80 | 6.0% | $2.46 | 2024 | $3.42 | 10.10% | $707.94 |
| $881.60 | 5.9% | $2.32 | 2023 | $3.10 | 10.10% | $641.70 |
| $832.20 | 6.8% | $2.19 | 2022 | $2.82 | 10.20% | $583.74 |
| $779.00 | 6.8% | $2.05 | 2021 | $2.56 | 10.30% | $529.92 |
| $729.60 | 7.3% | $1.92 | 2020 | $2.32 | 10.50% | $480.24 |
| $680.20 | 7.2% | $1.79 | 2019 | $2.10 | 10.50% | $434.70 |
| $634.60 | 7.1% | $1.67 | 2018 | $1.90 | 10.50% | $393.30 |
| $592.80 | 6.8% | $1.56 | 2017 | $1.72 | 10.30% | $356.04 |
| $554.80 | 7.4% | $1.46 | 2016 | $1.56 | 11.40% | $322.92 |
| $516.80 | 7.9% | $1.36 | 2015 | $1.40 | 16.70% | $289.80 |
| $7,136.40 | $4,740.30 |
A $10,000 investment in January 2015 would have bought you 207 shares of Cogeco, which would have given $4,740 in total dividends and $840 (207 shares x $52.37 price per share) in capital appreciation, a total return of 56%.
A similar investment in Capital Power would have bought you 380 shares. In these 10 years, they would have given $7,136 in dividends and $5,694 (780 shares x $41.3 price per share) in capital appreciation, a total return of 128%.
