Passive-Income Investors: 3 Qualities of Dividend Stocks That Work

Here are the three qualities you should look for in dividend stocks when you seek passive income.

| More on:
A close up image of Canadian $20 Dollar bills

Image source: Getty Images

It’s awesome to get real passive income! You need to watch out, though. There are lists out there that claim to show many ways to earn passive income, but most require active work. If you’re not careful, you could be creating more jobs for yourself. Of course, if you enjoy doing whatever it is that earns you semi-passive income, it could work well for you.

Even earning passive income from dividend stocks requires some work at least initially to identify suitable stocks. Below, I discuss dividend stocks with three qualities that should work wonderfully in creating passive income for you.

Dividend stocks that provide safe dividends

Fortis (TSX:FTS)(NYSE:FTS) is an easy-to-understand dividend stock that provides safe dividends. First, it’s a regulated utility that earns predictable earnings. Second, it maintains a sustainable payout ratio. Its 2021 payout was 79%.

Dividend stocks aren’t equal! Dividend stocks that have underlying businesses with more volatile earnings, such as cyclical stocks, would require a lower payout ratio for a bigger margin of safety to protect the dividend. Therefore, it’s a useful exercise to compare payout ratios of dividend stocks in the same industry to get an idea of sustainable payout ratios for stocks in that industry.

Ideally, investors should get growing dividends

Unless you need more passive income now, it’s usually better to own dividend stocks that are growing their dividends. While it can be enticing to get a 6% yield from a real estate investment trust (REIT) that doesn’t increase its dividend, it would be a better long-term investment to buy a dividend-growth stock like TC Energy that has a slightly lower yield of about 5.4%. TC Energy just raised its dividend by 3.4%. In the long run, its dividend increases will at least keep pace with inflation and help your passive-income stream maintain its purchasing power. This advantage is not present in a high-yield stock that keeps its cash distribution stagnant.

Fortis stock has 48 consecutive years of dividend growth. This streak is expected to continue into the foreseeable future. This is why many passive-income investors continue to hold their Fortis shares that they have purchased long ago! These smart investors are now sitting on big yields on costs and earning passive income they can rely on.

Your dividend stocks should allow you to sleep well at night

As an example, some retirees do not trust Manulife (TSX:MFC)(NYSE:MFC) as much as Fortis for passive income. However, Manulife’s recent results have proven that it is more than capable to maintain a safe dividend. Its payout ratio has a decent margin of safety to keep its dividend safe, even during the pandemic in 2020, despite its earnings dropping by about 7% that year, pushing its payout ratio up to about 41% as a result.

Manulife’s five-year dividend-growth rate is 9.6%. Over the next few years, its earnings growth should drive more healthy dividend increases.

At the end of the day, you need to be able to sleep well at night for the dividend stocks you hold. It doesn’t matter that someone else thinks another dividend stock is better if you can’t sleep by holding it.

Here’s one more tip. Aim to buy dividend stocks on sale to get more passive income for every dollar you invest!

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.

The Motley Fool recommends FORTIS INC. Fool contributor Kay Ng owns shares of Manulife.

More on Dividend Stocks

Dividend Stocks

Should You Buy This High-Growth Utility Stock Today?

While from a typically "boring" sector, this TSX utility stock offers unusually high growth potential if you are interested in…

Read more »

Baubles On Snow With Snowy Christmas Tree
Dividend Stocks

3 TSX Stocks to Buy in December 2023

Here's why quality TSX stocks such as Jamieson Wellness should be part of your shopping list in December 2023.

Read more »

analyze data
Dividend Stocks

Adjusting Your Portfolio for the New Normal: Higher Interest Rates in Canada

The 5% interest rate is here to stay until the second half of 2024. It's time to adjust your portfolio…

Read more »

Various Canadian dollars in gray pants pocket
Dividend Stocks

Are These the Best Canadian Dividend Stocks for a High-Rate Environment?

Are you looking for some of the best Canadian dividend stocks to buy? Here are two top picks for decades…

Read more »

Gas pipelines
Dividend Stocks

Is Enbridge Stock a Buy for its Big Dividend?

Enbridge is down more than 10% over the past year. Should you buy the dip?

Read more »

stock research, analyze data
Dividend Stocks

2 Top Stocks to Buy With $500 Today

Investing in the stock market does not always require massive capital. You can begin with just $500 allocated to stocks…

Read more »

Dollar symbol and Canadian flag on keyboard
Dividend Stocks

Got $500? 2 Top Canadian Stocks to Buy in December 2023

These two top Canadian stocks are doing well and might warrant a place in your self-directed portfolio before the year…

Read more »

eat food
Dividend Stocks

Maple Leaf Foods: Bringing Home the Bacon With a Tasty Dividend

Maple Leaf Foods is a stock with a reliable 3.44% dividend yield, which is backed by a defensive business in…

Read more »