A dividend yield of over 8% can double your money in nine years through dividend compounding. Now add to it a recovery rally of 25% to 40%. That is the total return of the TSX Composite Index in five years (40%). These dividend stocks could beat the market’s 4.5% average annual return in 2024 and beyond.
Two dividend stocks paying more than an 8% yield
A dividend yield is the annual dividend per share as a percentage of share price. If a $100 stock is paying an $8 dividend in a year, its yield is 8%. The Rule of 72 tells you in how many years a return can double your money. Let’s see what kind of returns you can expect from the stocks listed below.
Slate Grocery REIT
The interest rate hikes pulled down property prices, creating a two-year-long downturn in the real estate market. Many REITs saw their unit price fall as the fair market value of their properties dipped, creating an opportunity to buy REITs at a good discount. Slate Grocery REIT (SGR.UN) is one such stock. It has 117 properties in the United States and enjoys a 94.4% occupancy ratio even after it increased its rent by 10.8% for renewed and new leases. The management is confident it has more room to increase yield given that its rent is below the market and there is a shortage of retail properties in the United States.
The REIT’s distribution comes from the rental income, and its payout ratio sits at a comfortable 80.1% in the first quarter. The upcoming rate cuts by the US Fed will help the REIT see an improvement in occupancy, ensuring the safety of its distributions. Its unit price is determined by the value of the underlying asset, its property portfolio. The REIT’s unit price is 0.7 times the book value, hinting the unit is undervalued.
An interest rate cut will trigger a recovery in property prices over the next two to three years, driving Slate Grocery’s unit price to its normal level of $15. It represents a 25% upside from its current trading price of around $12. If you buy the units at the dip, you can lock in a 9.8% yield.
Note that the REIT gives distributions in US dollars and Canadian investors benefit from the exchange rate as they get distributions in Canadian dollars. A 9.8% yield can double your money in over seven years if reinvested.
BCE stock
Another interesting dividend stock that can help you beat the market is the telco BCE (TSX:BCE). Its stock price is still closer to its 10-year low because of various headwinds. However, rate cuts will reverse the headwinds and help the high-leverage telco reduce its interest burden. A 1% decrease in interest rates would help BCE increase its net income by $26 million. Moreover, the end of competitive pricing will stop hurting its net income. Add to this the cost savings from restructuring. All this will increase its free cash flow and reduce its dividend payout ratio, which has elevated to 113% in 2023.
The rate cut will also reverse the downtrend that began with the rate hike in April 2022 and pulled the stock price down 37%. The stock started its recovery rally in July and surged 7%. It has the potential to grow another 40% to its average trading price of $64 before the rate cut. This price growth will be backed by the 5G opportunity, which will connect several edge devices to high-speed internet and help them perform artificial intelligence (AI) at the edge. It will also open alternative opportunities in the cloud, security, and digital ad space.
And the returns don’t stop here. If you invest in the BCE dividend reinvestment plan (DRIP), your return could compound. Moreover, BCE could continue to grow dividends in the long term.
Buying into the current dip can help these dividend stocks generate market-beating returns.
