With 2024 just around the corner, I’m sure many Canadian investors, ourselves included, are getting excited about the new TFSA contribution room. Recently it became official that the 2024 TFSA contribution limit will be $7,000. This means that between Mrs. T and I, we’ll have a $14,000 TFSA contribution room.
For those Canadians who are eligible to contribute to TFSA since 2009, the new 2024 TFSA contribution room means you have an accumulative TFSA total of $95,000 available.
At a 4% dividend yield, that means your $95,000 TFSA can generate $3,800 tax free income for you each year.
If you’re not familiar with the TFSA, you may want to take a look at the millennial’s ultimate TFSA guide that I wrote.
Although the math shows that it makes sense to invest in US dividend stocks in your TFSA, we plan to use all of the $14,000 to buy Canadian dividend paying stocks. Why? Because this is the simplest approach. That way we’d avoid the 15% withholding taxes on US dividend paying stocks and as well as having to convert currency back and forth. Furthermore, Canadian dividend stocks typically have higher yields than their US counterparts, making TFSA a good investment vehicle to invest in these higher yield dividend stocks.
Which Canadian dividend stock are we considering buying in early 2024 for our TFSAs?
Let’s find out, shall we?
Consideration #1: Alimentation Couche-Tard (ATD.TO)
The first Canadian dividend stock we’re considering is Alimentation Couche-Tard.
Alimentation Couche-Tard operates convenience stores in 25 different countries. ATD’s stock price performance has shown that the company is very recession resilient.
Recently ATD’s management announced it aims to achieve US $10 billion in EBITA by FY2028, up from US $5.8 billion in FY2023.
It was interesting to note that back in 2018, ATD’s management launched the “Double Again” 5-year strategy where they set various doubling goals, including doubling EBITA. As FY2023 closed, ATD revealed that the company has achieved the Double Again strategic goal.
With a solid historical track record, I have confidence in ATD’s management that they can achieve the $10 billion US in EBITA goal in five years.
In addition, ATD has increased its dividend payout at an impressive rate of 21.2% over the last five years, showing that the management is very shareholder friendly.
Adding more ATD shares should help us on the total return front. Due to the low initial dividend yield, ATD wouldn’t be considered as a dividend income play initially, more as a growth stock with a slight dividend.
Potential Risks for ATD.TO
ATD has been expanding by acquiring other companies. Recently ATD announced it would acquire certain European assets from TotalEnergies. Since acquisitions are often costly and it takes additional time, money, and effort to integrate these acquired companies. This is just one of the potential risks for ATD.
Having said that, since ATD has done many acquisitions over the years and has shown that they can smoothly integrate the acquired companies under the ATD umbrella, so this potential risk is low.
ATD has a goal of expanding fresh food offerings in their convenience stores. The company also believes the #1 reason why customers visit their convenience stores is for cool drinks. As a result, ATD plans to invest money in their stores to enhance the customer experience in food and drink items. This can be a costly exercise if this move doesn’t improve revenue and gross profit to the levels that ATD anticipates.
Consideration #2: Canadian Natural Resources (CNQ.TO)
Next up on our consideration list is Canadian Natural Resources, a Canadian oil and natural gas company that operates primarily in Western Canada.
During the latest quarterly results, CNQ announced an 11% dividend hike, making the 24th consecutive year of dividend increases with a Compound Annual Growth Rate (CAGR) of 21% over the same time period.
Furthermore, the company has set a debt target of $10 billion which they believe will be achieved in Q1 2024. When this debt target is hit, the company has specifically stated it plans to funnel 100% of its free cash flow to shareholders through either share buyback or special dividends.
In the past Canadian Natural Resources paid a $1.50 per share special dividend in August 2022, so the general consensus among investors is that CNQ will declare a special dividend sometime in 2024.
Overall, CNQ is firing on all cylinders and the stock is at an attractive price considering the strong performance and significant free cash flow. It may make sense for us to buy more CNQ shares, dollar cost average up, and have more shares in anticipation of the special dividend in 2024.
Potential Risks for CNQ.TO
Canadian Natural Resources is an energy company, so its profitability is directly tied to the price of crude oil and natural gas. Therefore, the biggest risk would be if oil and natural gas prices unexpectedly tank in 2024 and stay low for a sustained period of time. This would hurt CNQ’s profitability and cause the share price to drop. Let’s not forget that both crude oil and natural gas prices are cyclical in nature, so CNQ performance can be cyclical as well.
This is exactly what happened in the early days of the global COVID-19 pandemic when the demand for crude oil was extremely low due to lockdowns. But CNQ showed its ability to weather the storm amidst all the pandemic uncertainties and didn’t cut its dividends, unlike many of its energy peers. As a shareholder, this gives me a lot of confidence in the CNQ management team.
As you can see in the above chart from CNQ, the company provided examples of how to stay robust through different financial cycles.
Consideration #3: Brookfield Asset Management (BAM.TO)
Although Brookfield Asset Management has a very different business model as Berkshire Hathaway, the two companies have many similarities. It may be a bit of a stretch but you can probably say that Brookfield Asset Management is the Canadian equivalent of Berkshire Hathaway. (And Brookfield CEO Bruce Flatt has often been referred to as “the Canadian Warren Buffett.”)
BAM is one of the world’s leading asset managers with $850 billion of assets under management (AUM) across renewable power and transition, infrastructure, real estate, private equity, and credit. The company also generated $4.3B annual fee revenue, achieving significant scale as a company.
What’s impressive is that Brookfield Asset Management grew its AUM significantly from $3 billion in 2022 to $850 billion in 2023.
Brookfield Asset Management is set up to distribute ~90% of its free cash flow and grow the dividend payout each year. Hence for making BAM quite attractive for dividend investors like us.
Before the split of Brookfield Asset Management and Brookfield Corporation, the parent company Brookfield Asset Management provided an annualized return of 19% for its shareholders from 2002 to 2022. This is very impressive.
As a shareholder, I have a lot of trust and confidence in Brookfield’s CEO Bruce Flatt and his team. I believe the team will continue to deliver remarkable performance for years to come.
Currently, Brookfield Asset Management and Brookfield Corporation make up less than
1.5% of our dividend portfolio. We’d like to add more shares and hopefully bump up the overall exposure to between 3 – 4% in the near future.
Potential Risks for BAM.TO
Due to how Brookfield Asset Management is structured, it will only pay out dividends if it is profitable and has free cash flow. So, if the AUM and free cash flow were to decrease, this would cause the dividend payout to drop. Having said that, since Brookfield is a well-managed company, the chance of this happening should be quite low.
Brookfield has a very complex structure and the splitting of the original Brookfield Asset Management into two companies makes things arguably even more complicated. For the average investor like you and me, it can get very confusing to go over the quarterly results and comb through all the financial statements.
In other words, if Brookfield decides to do some funny accounting (I highly doubt they will), the company might be able to do it through the various sub-companies.
Consideration #4: Telus (T.TO)
Telus is one of the big three telecommunication companies in Canada with 18.9 million subscribers as of Q3 2023.
2023 hasn’t been kind to Telus with the stock down almost 8% year to date. During the recent Q3 results, Telus announced that its Q3 profit was down 75% from a year ago. The company blamed the lower profit on high interest rates, high restructuring costs, and the high network buildout cost.
Interestingly Telus reconfirmed the 2023 consolidated financial targets and increased the dividend payout by 3.4% from $0.3636 per share to $0.3761 per share.
While the drop in profit is concerning, I noted that Telus added 406,000 customers in Q3, an increase of 17% YoY. This included an addition of 160,000 mobile phone subscribers. I am happy to see such strong subscriber growth, especially considering the increased competition in Western Canada given the Rogers-Shaw merger.
Telus currently has about 30% of the Canadian telecommunication market. Knowing that Canada is planning to welcome more than 485,000 new permanent residents in 2024, 500,000 in 2025 and 2026, if Telus continues to hold 30% of the Canadian market, the new immigrants should help continue to drive new subscribers for Telus.
Telus has been very shareholder friendly with a ten-year annualized dividend growth rate of 8.3%, which is roughly aligned with Telus management’s target of a 7 to 10% annual payout increase through 2025 with typically two raises annually.
Yes, Telus is facing some headwinds due to high interest rates and the high cost of rolling out stand-alone 5G networks. But this is not different than when Telus rolled out its LTE network across Canada many years ago.
At the current share price level and an initial dividend yield of 6%, I strongly believe Telus is a bargain and we should consider loading up on Telus shares.
Potential Risks for T.TO
The biggest risk is the level of debt that Telus has. As of Q3 2023, Telus has a substantial total liability of $38.1 billion. This can be a concern given the rising interest rates environment. In the Q3 2023 results, Telus management reported that its balance sheet remains strong with the average cost of the long term debt at 4.33% which is well below the current interest rates. Furthermore, Telus has a strong debt maturity schedule with the average maturity of the long term debt at nearly 12 years. So the rising interest rates shouldn’t be a major concern for Telus.
The Rogers and Shaw merger meant a strong competitor for Telus in its dominant region of Western Canada. It will be interesting to see how Telus deals with the aggressive phone, TV, internet, and cellphone pricing from Rogers and Shaw moving forward. If Telus decides to match Rogers/Shaw’s aggressive prices, this could mean an erosion of its profit margins.
The one benefit that Telus has over Rogers and Bell is that it doesn’t have to deal with media creation. But Telus has been branching out of its core telecommunication services. Telus International was one example where it underperformed, hurting Telus’ overall profitability. Therefore, Telus must be careful with its plan of expanding outside of its core competency moving forward.
Consideration #5: Royal Bank (RY.TO) and/or TD (TD.TO)
Royal Bank and TD are the top two banks in Canada. I grouped the two together here because they’re both in the financial industry and are very similar.
Like Telus, 2023 hasn’t been kind to both Royal Bank and TD, both have been in the red year-to- date. The poor performance has mostly been caused by concerns over high interest rates, potentially causing consumers and businesses to default on mortgage loans.
Personally, I believe the mortgage loan default concern might be a bit overblown. Both Royal Bank and TD have been setting aside money (i.e. loan loss provision) to protect themselves in case loans were to default. This is something that all Canadian banks did during the global pandemic. In the end, the banks didn’t need as much provisioning and the money ended up in the pockets of shareholders as dividends and share buybacks.
Both Royal Bank and TD are near their 52-week lows. The initial dividend yield of 4.65% and 4.74%, respectively, are considered quite high compared to 10 averages (3.9% for RY and 3.8% for TD). Although these initial yields aren’t anywhere close to the highest yield in the past 10 years (6% for Royal Bank and 6.3% for TD), I believe such high yields won’t stick around for too much longer.
Let’s not forget that both Royal Bank and TD have been paying uninterrupted dividends since the late 1800s. The word uninterrupted should make many dividend investors quite excited.
As Nelson, a fellow Canadian dividend investor & blogger pointed out recently. A really simple strategy that works well is to buy Canadian banks at 52-week lows. While we can’t predict the future with 100% accuracy, it is hard to ignore the historical facts.
Potential Risks for RY.TO and/or TD.TO
The biggest risk that Royal Bank and TD face today is the high interest rates and whether Canadians can continue to pay their mortgage payments. If Canadians start having problems paying their mortgages, this will create a major financial tsunami in Canada.
As an optimist, I don’t believe that’s going to happen. Canada’s inflation rate decelerated to 3.8% in September, down from 4% in August. This is a sign that the rising interest rates are effective and if the inflation rate continues to drop in the future, the Bank of Canada will consider lowering the interest rates.
Furthermore, I believe both Royal Bank and TD are too big to fail. If these two financial institutions were to fail, the Canadian economy would be in a lot of trouble. I strongly believe the Canadian government would have to help and bail them out.
Summary – dividend stocks we’re considering for 2024 TFSA
There you have it, five Canadian dividend stocks we are considering adding inside of our TFSAs in early 2024. I picked a mix of low yield high dividend growth stocks and high yield low dividend growth stocks. More importantly, I picked stocks that should give solid total returns in the long run.
What are some dividend paying stocks you’re considering adding to your TFSA in 2024?