3 Dividend Rock Stars for a Sizeable Passive Income

The reliability of dividends is just as important (if not more) as its yield, especially when you are planning to hold a dividend stock for decades, not just years.

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When you are planning on creating a passive income for yourself, what is more, important to you, reliability or size? Ideally, you’d like to have both, but we don’t live in an ideal world. If you had to choose one, reliability might be a better pick, especially in the long term. That’s especially true if you are planning your passive income around dividends.

The reliability of the modest yields of dividend aristocrats’ often trumps relatively higher (but riskier) yields. That’s because slowly and gradually, the consistent and continually growing payouts from aristocrats will pay you back the capital you invested in them. And if the stock comes with decent capital growth potential as well, that’s just the cherry on top.

A utility aristocrat

The reliability and dependability of dividends that Fortis (TSX:FTS)(NYSE:FTS), the second oldest aristocrat on the TSX, offers is hard to beat. With a dividend growth streak of 47 consecutive years, the company is just three years short of claiming the mantle of dividend king across the border. Fortis doesn’t just offer rock-solid dividends; it also offers modest capital growth prospects as well.

Currently, Fortis is trading at a price-to-earnings of 21 and a price-to-book of 1.5, not exactly underpriced but quite attractively valued. It’s offering a decent yield of 3.7% with a 10-year CAGR of 9.3%. While it might not be as powerful as a typical growth stock’s, it’s likely to be far more stable. As a utility stock with adequate market penetration and an international consumer base, Fortis is expected to stay financially stable for a very long time.

An energy stock

If a generous yield is the first thing you look into when choosing an aristocrat, then Pembina Pipeline (TSX:PPL)(NYSE:PBA) should be on your radar. The energy aristocrat with a dividend growth streak of nine consecutive years is currently offering a mouthwatering yield of 6.7%. The payout ratio is high but considering its history and payout ratios of its peers; it’s relatively safe.

The stock is still trading at a 28% discount compared to its pre-pandemic valuation. Before the 2020 crash, the stock used to offer relatively slow but consistent capital growth, but that might not be something you should bank on, especially considering the uncertain future of the energy sector. However, if oil rebounds, Pembina stock might start growing at a steady pace again.

A banking aristocrat

The banks in Canada offer a powerful combination of stability, dividends, and in some cases, long-term growth prospects. The Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) is not the best of the bunch, but it is offering one of the best yields in the banking sector right now (4.6%), at a stable 67% payout ratio. The capital growth prospects of BNS are minimal but not non-existent. It has a 10-year CAGR of 7.8%.

The financial institution is rock solid, as most of the Big Five tend to be. It has already recovered its pre-pandemic valuation, and if its year-to-date growth is any indication, the stock might slow steady growth for some time now.

Foolish takeaway

If you invested $20,000 apiece in the three stocks, you could start a monthly passive income of about $250. It’s not a substantial sum, but it’s likely to keep growing and can help you take care of some small monthly expenses. The yearly accumulated sum of $3,000 can also be invested elsewhere.

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 Adam Othman has no position in any of the stocks mentioned. The Motley Fool recommends BANK OF NOVA SCOTIA, FORTIS INC, and PEMBINA PIPELINE CORPORATION.

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