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Investors seeking to outperform the TSX while securing robust dividends should prioritize quality over yield. High dividend yields may signal underlying business issues and increase the risk of dividend cuts. Instead, focusing on TSX dividend stocks with smaller yet consistently growing dividends can lead to superior returns over time.
The Power of Small, Growing Dividends
Companies that consistently beat the TSX typically maintain dividend yield in the 2–5% range while regularly increasing dividend payments. By reinvesting most of their cash back into the business, these companies fuel earnings and cash flow growth, which supports dividend increases. Here are three TSX-listed stocks that exemplify this strategy:
Canadian National Railway (TSX:CNR)
With a history of strong cash flow generation, CNR has increased its free cash flow per share significantly over the past two decades. Despite yielding just 2% currently, CNR has consistently compounded its dividend at a rate exceeding 15% annually for 20 years. With a payout ratio comfortably below 40%, CNR retains ample room to reinvest in growth opportunities while sustaining its mid-teens dividend growth rate.
Goeasy (TSX:GSY)
As Canada's largest non-prime lender, goeasy has delivered remarkable returns, with its stock surging 278% over the past five years. The company has achieved annual earnings per share growth of around 30% since 2014, accompanied by dividend increases at a similar rate. Despite serving riskier consumers, goeasy's prudent management and robust retail network position it for continued growth. With a current yield of 3.6%, goeasy offers a compelling combination of income and growth potential.
Canadian Natural Resources (TSX:CNQ)
CNQ stands out for its commitment to returning excess cash to shareholders, having announced plans to allocate 100% of its excess generated cash back to investors. With a history of dividend growth at a compounded annual rate of 21% over 24 consecutive years, CNQ has consistently rewarded shareholders with substantial income. Bolstered by strong oil prices and ample reserves, CNQ is well-positioned to deliver attractive returns and sustained dividend growth in the years ahead.
In a market where quality and growth are paramount, investors can unlock significant potential by prioritizing stocks with smaller yet growing dividends. By avoiding the pitfalls of outsized yields and focusing on companies with strong fundamentals and a history of dividend growth, investors can build a portfolio poised for long-term outperformance. With Canadian National Railway, goeasy, and Canadian Natural Resources representing compelling opportunities in the TSX, investors can tap into both income and growth potential while navigating market uncertainties with confidence.
