Yahoo Finance CPP Benefits Not Enough? This Top Dividend Stock Can Help Fund Your Retirement
Written by Aditya Raghunath at The Motley Fool Canada
As the average Canada Pension Plan (CPP) payout in 2024 is less than $850, it’s evident that retirees need to supplement their income with additional sources. One low-cost way to begin a passive-income stream is by investing in blue-chip dividend stocks such as Magna International (TSX:MG). As dividend payouts are not guaranteed, it’s essential to identify a portfolio of stocks that can grow their dividend income each year, enhancing the yield-at-cost in the process.
Let’s see how you can use this top TSX dividend stock to supplement your retirement benefits.
An overview of Magna International
Valued at $15 billion by market cap, Magna International designs, engineers, and manufactures components, assemblies, systems, subsystems, and modules for original equipment manufacturers of vehicles and light trucks globally.
Down 58% from all-time highs, Magna International stock has trailed the broader markets in the past decade. Since September 2014, it has trailed the broader markets by a wide margin, returning less than 11%, even after we adjust for dividend reinvestments. Comparatively, the TSX index has more than doubled investor returns in this period.
In the last three years, Magna International has wrestled with macro headwinds such as supply chain disruptions, inflation, rising interest rates, and slowing automobile demand. However, the pullback allows you to buy the dip and benefit from outsized gains when market sentiment improves.
How did Magna International perform in Q2 of 2024?
In the second quarter (Q2) of 2024, Magna International performed in line with expectations, with sales of US$11 billion and an adjusted EBIT (earnings before interest and tax) margin of 5.3%. Its focus on operational efficiency should allow it to expand margins by 75 basis points by the end of 2025.
Magna International remains focused on capital discipline and strong free cash flow generation. For example, the company lowered its capital expenditures by US$200 million for 2024 and expects free cash flow to range between US$600 million and US$800 million this year.
Magna International currently pays shareholders an annual dividend of $2.56 per share, which translates to a forward yield of 4.9%. Given its outstanding share count, the company’s dividend payout will be roughly $750 million in the next 12 months, suggesting its payout ratio is quite high.
However, analysts covering Magna International expect adjusted earnings to expand from $7.44 per share in 2024 to $8.69 per share in 2025. So, priced at six times forward earnings, Magna stock is really cheap. Additionally, its earnings growth should translate to cash flow expansion in the next 12 months, lowering the payout ratio and improving the Canadian company’s financial flexibility.
A focus on cash flow and dividends
A higher interest rate environment and slower consumer spending have meant that Magna’s free cash flow has fallen from US$2.5 billion in 2019 to US$830 million in the last 12 months. Ideally, free cash flow expansion allows the company to reinvest in acquisitions, lower balance sheet debt, and raise dividends.
In the last 10 years, Magna International has increased its dividends by 10% annually on average, which is exceptional for a company in the cyclical automobile sector. While its payout ratio is under pressure, multiple rate cuts in the next 12 months should boost its free cash flow margin and share prices. Analysts remain bullish on Magna stock and expect it to gain 40% in the next 12 months.
The post CPP Benefits Not Enough? This Top Dividend Stock Can Help Fund Your Retirement appeared first on The Motley Fool Canada.
Should you invest $1,000 in Magna International right now?
Before you buy stock in Magna International, consider this:
The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Magna International wasn’t one of them. The 10 stocks that made the cut could potentially produce monster returns in the coming years.
Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $20,952.58!*
Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 32 percentage points since 2013*.
See the 10 stocks * Returns as of 9/3/24
More reading
Fool contributor Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool recommends Magna International. The Motley Fool has a disclosure policy.
2024
