A smart investor is the one who buys the dip and sells the rally. But not all dividend stocks that fall are worth buying. It is important to understand which ones are value buys. A value stock has earnings potential, a robust balance sheet, low debt, and strong management. Some of these factors may be impacted in the short term. In such a scenario, you have to look at the company's strategy to sustain its profits and ability to resume growth when the economy revives.
Smartest dividend stocks to buy with $1,000
When it comes to dividends, you have two options. Either invest in stocks with a high dividend yield or the ones with a high dividend growth rate. They both have significance in your investment portfolio. A higher dividend growth rate can generate higher passive income in the long term while a higher yield can generate higher income now. A smart approach is to invest some amount in both stocks and get higher returns now and later.
Telus stock
Telus Corporation (TSX:T) stock has dipped 11.5% in the December market correction even though the company announced a 3.5% increase in its dividend for the first quarter of 2025. The company's balance sheet debt is stressing its profits in the short term. Telus' dividend payout and net debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) are way above its target range. However, the company is implementing cost-cutting and restructuring to reduce these ratios.
The short-term headwinds are contained and are unlikely to affect Telus' dividend-paying capacity in 2025. In the worst-case scenario, Telus may slow its dividend growth rate from 3.5% semi-annually to 3.5% annually. Even then you are apt to benefit as it has a high dividend yield of 8.2%.
goeasy
goeasy (TSX:GSY) stock has dipped 5.6% in the December market correction. The sub-prime lender's stock price has been falling since July when interest rate cuts began. GSY stock is declining because the lender saw a significant increase in bad debts. However, its net charge-off rate as a percentage of average gross consumer loans receivable was 9.2%, within the target range of 8–10%. This shows that goeasy has its credit risk in check. Meanwhile, its loan portfolio continues to grow and so does its operating margin.
The lender is on track to grow its loan portfolio and profit margins, hinting that the dip is an opportunity to buy. goeasy is a growth stock with a history of paying regular dividends and growing them annually. It passes on some of the interest earned on the loan to shareholders. A bigger loan portfolio means higher interest, which converts to more dividends.
While the dividend growth rate is uneven, its average annual dividend growth for the last 10 years is 30%. If the lender grows its dividend at an average annual rate of even 15% in the next 10 years, you can build a sizeable passive income.
Investing in the above dividend stocks
A $500 investment each in the two stocks today can buy you 25 shares of Telus and three shares of goeasy. I have taken a conservative estimate whereby Telus grows its dividend by 3.5% annually instead of 7% and goeasy by 15% instead of 30%. At this rate, a $1,000 investment today can grow your annual dividend income to $113.50 by 2034. If you opt for Telus' dividend reinvestment plan, you could compound your returns. Or you could also use the dividend money to buy high-growth stocks like Hut 8.
