Cash Dividends vs. DRIP: 2 Different Approaches to Passive Income

Creating a passive income to augment your income today is quite different from cultivating a passive-income stream for the future and requires different assets.

| More on:
money cash dividends

Image source: Getty Images

There are a lot of different ways to start a passive income. The more capital you have, the more “passive-income-creation” options you can choose from. But capital is not the only variable necessary in identifying the right passive-income strategy. You have to look at your short-term and long-term passive-income goals, your risk tolerance, and a number of other factors before you take the right approach to passive income.

Similar to different strategies, there are different types of assets you can choose from. Dividend stocks are a common choice, and if that’s the asset you are going with, there are two different passive-income approaches that you might consider.

A passive stream for the present with cash dividends

If you have an adequate amount of capital at your disposal, and you have identified safe, reliable dividend stocks, you can start a healthy passive income to augment your primary income. One such stock would be the energy king Enbridge (TSX:ENB)(NYSE:ENB). The pipeline giant of North America that’s responsible for moving a sizeable portion of the total oil and natural gas in the region is also one of the most beloved Dividend Aristocrats in Canada.

Not only does the company almost always offer a mouthwatering yield, but time and time again, despite the harshest market conditions, the company keeps rewarding its investors with generous dividends. It even raised its payouts by a significant margin in 2021 after suffering a brutal pandemic year, which was especially difficult for the energy sector.

If you invest a sizeable amount of capital in the company, say $100,000, you can start a passive-income stream of about $6,310 a year. That’s over $500 a month — quite a sizeable sum for completely hands-off passive income.

A passive-income stream for the future with DRIP

Relatively few people have enough free cash set aside to create sizeable passive-income streams that can actually help them with their regular expenses. And if they can make do without the small amount of dividend income, they can produce with their relatively small capital, a better use would be the DRIP.

With this approach, you can keep growing your stake in a good dividend payer, and when it comes the time to start taking their dividends in cash, you will receive a much healthier sum than would have been possible with your capital.

An example would be Telus (TSX:T)(NYSE:TU). If you had invested $10,000 in the company exactly 15 years ago to buy about 705 shares, you would have grown your stake to about 1,348 shares by now and your financial stake to over $41,000. At $1.31 per share in yearly dividends, this comes out to about $1,765 in dividend income.

That’s more than one-fourth the yearly income with just one-tenth of the capital invested. And that’s disregarding the capital appreciation.

Foolish takeaway

It’s important to note that your choice of the dividend stock can significantly alter the “fate” of your passive income, regardless of the approach, so be careful with the companies you bet on. The TFSA is the no-brainer option for the first passive-income approach, and it would also be a smart choice for the second one, thanks to the accessibility it offers.

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 Enbridge and TELUS CORPORATION.

More on Dividend Stocks

money cash dividends
Dividend Stocks

Want Passive Income: Hold This Canadian Dividend Growth Stock Forever

Passive income seeking investors can now buy shares of dividend-paying blue-chip companies at a discount, such as Brookfield Infrastructure.

Read more »

Senior Couple Walking With Pet Bulldog In Countryside
Dividend Stocks

Retirees: 2 On-Sale TSX Dividend Stocks to Buy Now for Passive Income

These top TSX dividend stocks now offer 6% yields.

Read more »

Payday ringed on a calendar
Dividend Stocks

New Investors: The 3 Best TSX Dividend Stocks for Monthly Cash

New investors looking for monthly dividend cash are in luck! Here are three attractive Canadian dividend stocks for growth and…

Read more »

A worker gives a business presentation.
Dividend Stocks

3 Dividend Stocks You Can Safely Hold for Decades

Here are three of the safest Canadian dividend stocks you can buy right now to hold for decades.

Read more »

Red siren flashing
Dividend Stocks

Buy Alert: This Energy Stock Is Unstoppable After Strong Results

Tourmaline Oil (TSX:TOU) beat earnings and looks unstoppable.

Read more »

Female hand holding piggy bank. Save money and financial investment
Dividend Stocks

2 Safe Dividend Stocks to Beat Inflation

Canadian investors, young and old alike, can cope with or even beat inflation by owning two safe dividend stocks.

Read more »

Dollar symbol and Canadian flag on keyboard
Dividend Stocks

2 Canadian Dividend Stocks (With +6% Yields) You’ll Regret Not Buying at These Prices

TSX dividend stocks such as TC Energy and TransAlta Renewable are well poised to deliver consistent returns to long-term investors.

Read more »

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Dividend Stocks

2 TSX Stocks With Market-Beating Potential

Even in the current economic environment, long-term investors have a great chance of beating the market. Stocks like CN Rail…

Read more »