Balancing passive income generation with long-term capital appreciation is entirely achievable in a personal investment portfolio. The Toronto Stock Exchange and its junior trading platforms (including the TSX Venture) are packed with reliable dividend payers. Among them, two Canadian dividend stocks stand out for their capacity to deliver respectable dividend yields and meaningful capital gains over the next five years.
Before diving into two of the best TSX stocks to buy now for both dividend income and wealth growth, let’s address the general tradeoffs investors face when deciding on which dividend stocks to buy to achieve both desirable ends.
Striking a balance between dividend income and capital gains
High yield dividend stocks often sacrifice growth. It’s structural. Companies with limited reinvestment opportunities tend to return more cash to shareholders via dividends and share repurchases.
Because they face low-return investment opportunities in their business lines and fields of expertise, many dividend stocks have to return more of their internally generated capital and cash flow to investors. That’s fine for income. Because they usually pay predictable and recuring dividends, investors can actually build a passive income portfolio around them. But high-yield dividend stocks rarely generate capital gains.
It would appear as if you have to choose between either high dividend income or capital growth (earned through rising stock prices). But that’s not so true.
The best dividend stocks are those that strike a balance between paying out solid dividends while retaining enough capital to reinvest for growth. These stocks often start with modest yields, but as revenue, earnings and cash flow grow, both dividends and share prices tend to rise steadily over time.
The Bank of Nova Scotia (TSX:BNS) stock and the Decisive Dividend Corp. (TSXV:DE) are some of the best dividend stocks to buy now for respectable yields and capital appreciation over the long term.
Let’ take a closer look.
Scotiabank stock: A big bank paying a bigger yield
The Bank of Nova Scotia, or Scotiabank stock is currently offering one of the better risk-reward profiles among Canadian bank stocks today. Its dividend yield close to 3.8% is a full percentage point higher than competing yields from Big Five peers like the Toronto-Dominion Bank (TD Bank) stock (2.6%) or Royal Bank of Canada (2.5%).
BNS has raised its dividends for four consecutive years now. Its quarterly payouts appear well covered by earnings with an earnings payout rate around 60%.
Beyond the yield, Scotiabank is repositioning for growth. It has been pruning its exposure to more volatile emerging markets and doubling down on North American growth opportunities. With a $1.5 trillion asset base and diversified earnings streams, BNS stock offers both income stability and long-term upside.
BNS stock’s 13.2 times forward PE appears decent despite its 61% rally during the past 12 months.
Decisive Dividend Corp.
Over on the incubatory TSX Venture Exchange, Decisive Dividend Corp. is proving that small caps can generate big returns and growing income. This manufacturing conglomerate uses an acquisitions-led strategy to expand its revenue and earnings base, and it decisively raises dividends as it goes.
Decisive Dividend pays a dividend every month. It raised payouts for five consecutive years over the past decade, and today the monthly dividend yields a juicy 5.9% annually.
In June, Decisive Dividend stock announced a $19.9 million acquisition of Be Fire SA, a Belgian specialty hearth manufacturer. Management noted this vertical has generated “strong historical returns”. The target is already profitable and cash flowing. Deals like this grow earnings and increase the cash flow needed to sustain rising dividends.
DE data by YCharts
So far this year, DE stock has generated 29.3% in total returns. Over the past five years, the dividend stock generated a staggering 250% in total gains, while the dividend itself has grown 125%. Despite that strong run and a double-digit earnings growth outlook, shares trade at a reasonable forward PE of 15.9 times.
Investor takeaway
Scotiabank stock and Decisive Dividend stock offer growing high-quality income yields combined with room for capital appreciation. They could do well in a portfolio designed for both passive income and sustained capital growth.
