Written by Puja Tayal at The Motley Fool Canada
Many new investors have a misconception that stocks are a form of gambling. It is because you see your investment value dip in the short term. However, knowing what to expect from the stock can give you confidence in investing and help you plan your investments accordingly. Every business earns money differently.
For instance, a retailer or consumer products business is seasonal as they earn revenue from sales. An insurance company earns revenue from premium payments and management fees, a utility from usage bills, and a software company from subscriptions. Knowing the way a company earns revenue, you can determine whether it is growth-oriented or has regular cash flow.
Two Canadian stocks that offer both growth and dividends
Here are two regular cash flow stocks that are growing their business, thereby giving you both dividend and growth.
Manulife Financial stock
Manulife Financial (TSX:MFC) pays dividends from the insurance premiums. It also has a wealth management division that earns regular cash flow from management fees. Manulife has been growing its dividends for 13 straight years at an average annual growth rate of 10%.
Despite this growth, the company’s dividend payout ratio has been within its long-term target range of 35–45%. This is a safe range, giving the insurer a buffer for any sudden spike in claims or a performance dip in the wealth management portfolio. This ensures that the insurer can keep paying and growing dividends.
For the growth angle, Manulife has been expanding its portfolio by acquiring companies in North America. It has even expanded its geographical reach in Asia and entered India through a joint venture with Mahindra & Mahindra. Tapping high-population areas opens up avenues for more insurance and investment product sales. The stock has surged 20% in the last year and is trading at two times its price-to-book (P/B) ratio.
The market has priced in this growth in the stock price. There is less room for growth unless a major acquisition or portfolio restructuring that unlocks more value is announced. Nevertheless, the dividend growth will continue. It is a stock to buy at a dip, provided the reason for the dip is external factors and not company-specific.
Canadian Natural Resources
Canadian Natural Resources (TSX:CNQ) is the exact opposite of Manulife. Its share price is affected by external factors that determine oil and gas prices. Business expansion and efficiency determine dividend sustainability and growth.
Canadian Natural Resources has the world’s second-largest oil sands reserves. It has been acquiring more reserves in the last two years to expand production. Since the company deals with commodities like oil and gas, its stock price surged 62% in January due to the March energy shock from the U.S.-Iran war. It is because oil prices surpassed the US$100 level. CNQ could sell oil at a much higher price than the average US$50-US$60.
Leave a comment