Written by Puja Tayal at The Motley Fool Canada
There is a notion that you need thousands of dollars to invest in stocks. Another notion is that a good quality stock that can give you decent returns will be priced at hundreds of dollars. These are myths. The share price does not determine quality. In fact, some of the best high-quality dividend stocks are available under $50.
One often wonders, is $50 too little an amount? If you invest $50 every week, your investment increases to $2,600 in a year and $26,000 in 10 years, without even setting aside money specifically for investing. It’s like that savings jar where you put the change only to realize later the jar holds a huge amount.
But the difference between a savings jar and investing is that the latter compounds returns, and what you have at the end of 10 years is far more than $26,000.
Canadian Natural Resources (TSX:CNQ) has a 25-year record of non-stop annual dividend growth, as low as 2% to as high as 50%. How does it manage to keep growing the dividend? By incorporating the dividend component in the break-even price of mid-$40s per barrel. CNQ’s business model has a fast conversion cycle. It keeps digging wells and processing synthetic oil, natural gas, and WTI crude at a nearby processing plant, removing the capital cost of building and maintaining multiple plants.
The fast cash conversion enables CNQ to repay debt at a faster rate and use free cash flow to pay dividends and buy back shares.
CNQ increases production during the upcycle, where it can fetch a good price for its output. This increases cash flow, which it uses to pay dividends and buyback shares. During the downturn, CNQ reduces capital expenditure and debt to increase cash flow and pay dividends. You can buy one stock for $43.20 and get $2.35 in annual dividends. That is a 5.5% return, higher than the interest on a term deposit. And unlike a term deposit, the dividend amount may grow by mid-single-digits next year.
If you had invested $50 in December 2015, you could have bought three shares for $15, and today that $50 would have fetched you $7.50 annually. This amount may look small, but multiply it by 52 weeks or 520 weeks for 10 years to see how it compounds.
For the ease of calculation, I took a $2,600 investment in CNQ on January 1. The $26,000 investment in CNQ in 10 years would have bought you 1,180 shares that would pay $2,774 in annual dividends in 2025. And if we consider the cumulative 10-year dividend payout, it is $11,871. That is the opportunity cost of delaying investment just because the price was never right.