Dividend-paying stocks provide long-term investors with much-needed passive income to help offset periodic dips in the value of growth stocks. Indeed, a company that pays a dividend and redistributes capital to shareholders is one that provides a tangible return on investment over a given time period.
Additionally, during times like now, when price fluctuations are the norm, dividend-paying stocks can boost returns while providing a defensive posture for investor portfolios. That’s mostly what the doctor ordered for the average risk-averse investor.
Growth, safety, and current dividend yield are the three factors you should consider when evaluating dividend stocks. A low-yielding stock may be ranked higher due to the company’s dividend growth, whereas a high-yielding income stock may be ranked lower due to safety.
Having tunnel vision on a given company’s current dividend yield is an error that dividend investors frequently make, especially novice ones who are yet to explore the stock market. They disregard the company’s financial stability or the dividend payout ratio in favor of pursuing high yields. However, the biggest yield isn’t always indicative of the finest dividend investments.
Investors all over the world are increasingly exploring dividend investments to help them get through this unsettling time due to market volatility. The adverse effects of inflation have been offset over time by dividend stocks as they offer regular payouts to investors. Here are the top three stocks for a passive income portfolio to aid you in making decisions. Each of these companies happens to be based in Canada and, as such, are dividend-paying stocks, which I think are overlooked right now.
Canadian Natural Resources (CNQ)
Let’s kick off this list of dividend-paying stocks with one of the top oil and natural gas producers in Canada. Canadian Natural Resources (NYSE:CNQ) is a company that’s seen increased interest due in part to a rise in energy and commodity prices of late.
While many of the geopolitical concerns that have led to higher energy prices remain, demand expectations have fluctuated wildly. Thus, it’s unclear how CNQ stock will perform relative to the rather wide swath of dividend stocks in this sector.
That said, I do think Canadian Natural is one of the best ways to play this sector, particularly for investors looking for geographic exposure. The company’s solid operating model has led to C$6.1 billion in operating cash flow in Q3 alone and C$1.7 billion in free cash flow (after dividend payments). This is a company that’s increased its dividend payout for more than two decades in a row, making CNQ a dividend aristocrat worth considering.
With a current yield of approximately 4.2%, CNQ stock provides long-term investors with high-quality defensive income in an uncertain market.
Restaurant Brands (QSR)
In my view, one of the more overlooked dividend-paying stocks Canada has to offer is Restaurant Brands (NYSE:QSR). This 3.2% yielding stock is one of the best long-term investment options right now, in my opinion. It’s my largest portfolio holding for a number of reasons, including its notable yield.
An umbrella company holding prominent fast-food brands Burger King, Tim Horton’s, Popeye’s Louisiana Kitchen, and recently-acquired Firehouse Subs, Restaurant Brands has some serious brand power worth considering. In this uncertain market, pricing power is about to become ultra-important. Strong brands, such as these iconic fast-food names, provide pricing power when times get tough. Additionally, we all need to eat, and these banners could arguably see greater volume in a recessionary environment as consumers trade down.
It’s also worth noting that Restaurant Brands has some impressive growth prospects, particularly in its global expansion plans. Many of these banners are under-represented in Asia. Accordingly, as the company builds its global presence, investors stand to reap the benefits of these world-class brands.
Bank of Nova Scotia (BNS)
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Bank of Nova Scotia (NYSE:BNS), or Scotiabank, is one of the big six Canadian lenders, with a solid and growing presence in the U.S. and other Latin American countries. This company’s business model is one that’s historically been less focused on growth and more on providing significant dividend income to investors. With a current dividend yield of 5.9%, that’s certainly the case to this day.
Notably, Scotiabank has increased its dividend every year since 2010, before the necessary dividend freeze. Since Scotiabank’s first dividend payment in 1833, the company has never missed a dividend payment. That’s the sort of consistency long-term investors want to see.
Additionally, this is a company that’s increased its dividend in 44 of the past 46 years. All of Canada’s Big Banks’ dividend growth streaks were halted by the 2008 Financial Crisis. Not one, however, reduced its dividend. This is in sharp contrast to what occurred globally.
A notable increase over its long-term average yield of 4.7% is the Bank of Nova Scotia’s current yield of 5.8%. With a payout ratio of 51%, which is in line with the bank’s 5-year average, the Bank of Nova Scotia dividend is adequately covered. Over the past 20 years, Scotiabank’s dividend has increased at a CAGR of 9.2%.
In the past, Scotiabank has struggled to stay up with the other central banks due to its consistent irregularities. However, currently, it has the highest dividend yield among all bank stocks in Canada.
On the date of publication, Chris MacDonald has a position in QSR. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective.
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