When building a passive income stream from dividend stocks, there are two key things to keep in mind: the safety of the principal and the safety of the dividends.
How to keep your principal safe
You should aim to buy shares of proven businesses when they’re undervalued — and if you do, you’re in luck! Currently, Bank of Nova Scotia (TSX:BNS)(NYSE:BNS), Brookfield Infrastructure Partners (TSX:BIP.UN)(NYSE:BIP), and Pembina Pipeline (TSX:PPL)(NYSE:PBA) are proven businesses that are all trading at modest discounts from their fair valuations.
According to the 12-month mean price targets from Thomson Reuters, the dividend stocks have about 10% near-term upside potential. This indicates the stocks are modestly undervalued.
What makes a stock’s dividend safe?
Looking for proven businesses that tend to increase their profitability and dividends is a good start. The businesses should also have strong balance sheets and sustainable payout ratios.
Scotiabank, Brookfield Infrastructure, and Pembina are awarded S&P credit ratings of A+, BBB+, and BBB, respectively, which are all better than the minimum investment-grade rating of BBB-.
Scotiabank’s payout ratio is estimated to be about 50% this year. Brookfield Infrastructure’s funds-from-operations payout ratio is estimated to be about 60% this year. And Pembina’s payout ratio is estimated to be about 50% of operating cash flow. Compared to their respective industries, all their payout ratios look fine.
How to make $300 of passive income per month
The average dividend yield across the three stocks is 4.85%. In order to go get $300 of passive income per month (or $3,600 per year), investors need to invest $74,227 evenly across the three stocks and incur any trading fees that come with the three trades. That’s an investment of $24,743 in each of the stocks.
Scotiabank trades at $71.45 per share at writing. An investment of $24,743 would imply buying about 346 shares. Brookfield Infrastructure trades at $56.50 per unit as of writing. An investment of $24,743 would imply buying about 438 units. Pembina trades at $48.91 as of writing. An investment of $24,743 would mean buying about 506 shares.
By holding a diversified basket of dividend stocks that have a track record of paying safe dividends, investors can pretty much guarantee to earn a growing passive income stream.
Investors can start off investing $74,227 evenly across the stocks of Scotiabank, Brookfield Infrastructure, and Pembina Pipeline to get an initial amount of $300 per month.
That’s a big lump sum to invest at one time. The important thing is to start investing for a passive income stream. You might start with earning $100 or even $10 a month. If you keep building that passive income stream, before you know it, it’ll become $300 a month or even $3,000 a month.
Remember that these quality dividend stocks tend to increase their dividends. You can count on them increasing their dividends by at least 5% per year. That’ll also help you boost your passive income on top of any new money you invest for dividends.