When buying dividend stocks to start a passive income from your Tax-Free Savings Account (TFSA), it’s important to consider a range of variables like yield and sustainability. The long-term sustainability of a company’s dividend is itself influenced by a range of variables, including its business model and finances, and it might not change very frequently. Yield, however, changes with the stock’s movement.
Many investors have a threshold for that. A dividend stock might not be good enough for them until its yield reaches a certain level, which usually happens when the stock falls substantially enough. Two stocks might be in that category for many investors right now.
A utility stock
Fortis (TSX:FTS) is one of the best dividend stocks in Canada, as it ticks almost all the boxes. It’s a utility company, one of the safest and most financially consistent businesses.
It has been growing its payouts for 49 consecutive years (a solid dividend history), and its yield is usually at a healthy level, typically around 4%. The capital appreciation is modest at best, even in the long term, so dividends are generally the primary reason most people lean toward this company.
However, when dividends are the primary source of returns you expect from a company, the usual goal is to get as good a deal as possible, and at the current yield of 4%, it might not cut it for most investors. The stock has been going up at a fantastic pace since mid-June, eroding the dividend yield.
But a sizable dip might revert it back to a more attractive level—maybe 4.5% or even close to 5% if the stock slumps hard enough. The company’s fundamentals are strong enough for a fall to come from the inside, but a weak market might push the stock down enough to make the yield more attractive.
A bank stock
If you are looking into Canadian bank stocks purely for their dividends, and yield is your most heavily “weighted” assessment factor, then National Bank of Canada (TSX:NA) wouldn’t usually be on your radar. It has one of the lowest yields in the banking sector: 3.9% when writing this.
The reason its yield is low is also the reason investors might consider this stock despite the low yield—i.e., its growth potential. Based on the price appreciation in the last decade, it’s the best growth stock among the Big Six, growing its investors’ capital by about 132% over that period.
The yield might need to be higher to cut it for most investors, especially the ones focused on a sizable passive income, but it’s not too low either. Even a tiny dip would push it to four; a substantial dip can easily take it to 4.5% or higher.
Foolish takeaway
Even though the yields of the two stocks are decent enough now, it might be a good idea to wait a bit. The market is going through a correction phase, and if it turns into a sizable market crash, you can buy both of these stocks at a steep discount and lock in much more attractive yields than the ones available right now.
