What if there were an easy way to generate over $1,000 a month in passive income? This payout can contribute towards the payment of utilities, a part of your mortgage, or even a vacation.
No, I am not talking about buying an expensive property that can be rented out for $1,000 every month. Bonds are also out of the question, as yields are between 1% and 2.5%, and you would require in excess of $500,000 for a $1,000 monthly payout. Even real estate investment trusts (REITs) have an average dividend yield of around 5%.
There is an opportunity to invest in high-dividend-yielding stocks. The energy and chemical sectors in Canada are in the midst of a multi-year slump, which means stock prices of several companies have been decimated in recent times. This has resulted in high dividend yields, which can be attractive, especially considering the mouth-watering prospect of capital gains in case the share price bounces back.
Vermilion Energy
Vermilion Energy (TSX: VET)(NYSE: VET) is a Canada-based international energy company. It focuses on conventional and semi-conventional exploration development projects. Vermilion is interested in light oil and liquids-rich natural gas. It manages the acquisition, exploration, development, and optimization of producing properties in North America, Australia, and Europe.
Vermilion sales rose from $894 million in 2016 to $1.67 billion in 2018. However, analysts expect sales to rise by 11.9% to $1.71 billion in 2019 and then fall 3.5% to $1.65 billion in 2020. This deceleration in revenue growth has meant shares have fallen by a considerable 40.6% in the last 12 months compared to the S&P 500 gains of 23.7%. In the last five years, Vermilion investors have lost a massive 68%.
The decline has meant Vermilion stock has a forward dividend yield of 14.6%. So, an investment of $50,000 in the stock will generate annual dividend payouts of $7,300. Is Vermilion’s high dividend yield sustainable?
The company has a debt balance of $2.05 billion and cash reserves of $10.23 million. With operating cash flows of $782 million, it can easily service debt obligation and continue to pay dividends.
Chemtrade Logistics Income Fund
Chemtrade Logistics Income Fund (TSX: CHE.UN) provides industrial chemicals and services. It generates over 60% of revenue from the United States, around 30% from Canada, and the rest from South America.
As the name suggests, the stock is structured as an income fund. This means investors can expect a monthly dividend payout. The company has been paying monthly dividends since 2001.
Despite the volatility in the chemical sector, Chemtrade has managed to sustain a five-year dividend yield of 8.1%. Now driven by a 26% decline in stock price, the company’s forward yield stands at a massive 13.5%.
Chemtrade has a debt balance of $1.54 billion and with operating cash flow of $158.67 million, it can continue to pay dividends to shareholders.
Analysts covering Vermilion and Chemtrade are bullish about the companies. The average price target estimate for Chemtrade stands at $11.53, which is 31.3% higher than the current trading price. Comparatively, Vermilion stock is trading at a discount of 29.4% to consensus target estimates.
It is not advisable to allocate $100,000 to two beaten-down stocks that might slide further. However, income investors can use this information as a starting point to build a robust portfolio of income-generating investments, which will result in stable and recurring cash flows over the long term.
