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 (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.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Aditya Raghunath has no position in any of the stocks mentioned.