How to Plant Money Trees to Build a Robust Passive Income

Here’s how to build a lasting passive-income stream with quality dividend stocks.

| More on:
Growing plant shoots on coins

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

It’s more financially secure to earn income from multiple sources. It’s even more so through the COVID-19 pandemic. Many people whose income was impacted wish they had passive income, which flows into their pockets without their having to lift a finger.

There’s no free lunch. All passive income requires initial active work.

In terms of building a robust passive-income stream from quality dividend stocks, this is the type of initial work you need to do. Here are the steps to planting your money trees with dividend stocks.

This is a long-term endeavour. As long as you plant the right trees (buy the right dividend stocks), your passive income will last forever!

Identify a list of dividend stocks to own

Set clear criteria for candidates in your money-tree portfolio. First, the dividend stocks should offer safe dividends. Second, diversification of the portfolio should be accounted for.

Third, ideally, you want stocks that increase their payouts over time. If a stock doesn’t do that, it should either offer an above-average yield or is substantially cheap, which could lead to juicy price appreciation in the near term.

Canadian Dividend Aristocrats, dividend stocks that have increased dividends for at least five years, are a good place to begin your research. Currently, the top 10 constituents of the S&P/TSX Canadian Dividend Aristocrats Index are SmartCentres REIT (TSX:SRU.UN), Keyera, Pembina Pipeline, Enbridge, Canadian Natural Resources, Fiera Capital, Exchange Income, Power Corporation, BCE (TSX:BCE)(NYSE:BCE), and TC Energy.

Keyera, Pembina, Enbridge, and TC Energy are in the same industry of energy infrastructure. So, you might choose to own one or two at most. They’re a good bunch to consider, as energy infrastructure stocks are relatively cheap compared to the market.

Setting price or yield targets

It’s relatively easy to determine a maximum price or minimum yield to pay for Canadian Dividend Aristocrats that consistently increase their dividends. For example, BCE has increased its dividend by about 5% a year since 2013. This consistency has allowed its dividend yield to create some sort of support for the stock.

BCE’s yield history shown in the chart below illustrates that it has support at around a 6% yield. So, you might consider buying it for passive income at a yield of 6% or higher.

BCE Dividend Yield Chart

BCE Dividend Yield data by YCharts.

Notably, this logic can be broken in extreme market conditions. Using this sort of logic on SmartCentres, one might have thought that a 6% yield is a pretty good place to buy the retail REIT for passive income before the pandemic market crash.

SRU.UN Dividend Yield Chart

SRU.UN Dividend Yield data by YCharts. SmartCentres’ yield history before the pandemic market crash in 2020.

Despite the REIT maintaining its cash distribution throughout the pandemic, its yield shot up to very scary levels in that market crash, as investors worried about the possibility of a dividend cut.

SRU.UN Dividend Yield Chart

SRU.UN Dividend Yield data by YCharts.

Regardless of whether a dividend cut occurs or not, the substantial price cut in the stock was an opportunity to buy the income stock on the cheap. After the market crash, the stock stabilized roughly in the $20 range before rising 40% to today’s levels. Meanwhile, those who bought in the $20 levels, which were not even the bottom, locked in a +9% yield!

The Foolish takeaway

Once you buy safe dividend stocks at cheap levels, you can essentially hold the portfolio of diversified stocks for a lasting passive income without lifting a finger!

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 Kay Ng owns shares of Pembina Pipeline, and TC Energy. The Motley Fool owns shares of and recommends Enbridge. The Motley Fool recommends KEYERA CORP, PEMBINA PIPELINE CORPORATION, and Smart REIT.

More on Dividend Stocks

Woman has an idea
Dividend Stocks

2 Low-Risk Growth Stocks Paying Great Dividends

These top TSX dividend stocks give investors exposure to interesting growth opportunities.

Read more »

A person builds a rock tower on a beach.
Dividend Stocks

Got $300? 2 Simple TSX Stocks to Buy Right Now

These two simple TSX stocks have everything a long-term investor looking to dollar cost average into a position wants right…

Read more »

A golden egg in a nest
Dividend Stocks

Millennials: No Excuses! Start Saving for Retirement Right Now.

Millennials, we need to stop complaining and start bragging. We're great savers, so it's time to start investing in TSX…

Read more »

Value for money
Dividend Stocks

3 UNDERVALUED TSX Stocks to Buy in August

Here are some attractively valued TSX stocks for the long term.

Read more »

A young man throwing and catching his daughter above his head
Dividend Stocks

Parents: Double Your CCB Payments This Month!

Parents can use those CCB payments to their benefit and double them this year month after month -- no waiting,…

Read more »

stock market
Dividend Stocks

I’m Buying These 3 Resilient Stocks During a Bear Market

TD Bank stock is among the three stocks I'm buying to protect my portfolio from a bear market and to…

Read more »

edit Safety First illustration
Dividend Stocks

4 of the Safest Dividend Stocks on Earth Right Now

These dividend stocks offer up strong dividends, a cheap share price, and safety from growing, safe sectors of the market.

Read more »

A person builds a rock tower on a beach.
Dividend Stocks

Change Your Future: What to Hold in a TFSA in 2022

Holding dividend growth stocks in a TFSA long-term can change the financial futures of worried Canadians.

Read more »