Is rising inflation burning a hole in your pocket? Are you falling short of money for your daily needs but do not want to use your savings? Your savings can earn $8 a day in tax-free income while your principal amount stays more or less the same. This is no Ponzi scheme; it’s investing in genuine businesses to whom you are a customer: energy, telecom, and utility companies.
Risks and rewards of investing in dividend stocks
When searching for genuine dividend stocks, look at the business and its free cash flow. Dividend stocks enjoy a minimum demand which ensures a fixed cash flow. Some sectors that house Dividend Aristocrats include energy, utilities, real estate, telecom, and banks. These companies develop and maintain their infrastructure efficiently, and consumers pay for using their infrastructure. They pass on a certain percentage of this cash flow to shareholders through dividends. Such companies do well in a high inflationary environment.
However, these companies are prone to risks, like a sudden dip in demand below the minimum level (as happened during the pandemic) or a natural or manmade disaster that destroys a facility. They are also prone to macro, regulatory, political, and environmental risks. For instance, TC Pipelines backed out from its Keystone XL Pipeline, as U.S. president Joe Biden cancelled the project.
Nevertheless, the returns outweigh the risks, making dividend stocks a good investment to fall back on during a crisis or to earn passive income.
Three dividend stocks to buy in May
Here are three dividend stocks that can earn you $8 a day.
- Enbridge (TSX:ENB)(NYSE:ENB): 6.16%
- TransAlta Renewables (TSX:RNW): 5.33%
- Slate Office REIT (TSX:SOT.UN): 8.02%
Enbridge stock
I recommend Enbridge stock to beginners for its robust business model and cost structure. The company earns toll money for transmitting oil and natural gas through its pipelines. Its cash flow is unaffected by oil and gas prices. It keeps adding new pipelines and revises its toll money at regular intervals. That explains its 27-year record of growing dividends.
But Enbridge, like TC Pipelines, is prone to natural or manmade destruction of its pipelines. So far, none of its ongoing projects face significant environmental or regulatory hurdles. However, the pandemic reduced the oil volumes transmitted through its pipelines. But higher natural gas volumes and new wind energy projects partially offset the oil volume dip.
Enbridge is taking a cautious stand. It has slowed its dividend-growth rate from around 10% before the pandemic to 3% in 2021 and 2022. But the stock is riding the oil price rally, as sanctions on Russian oil make Canada a viable alternative supplier for the United States. The existing pipelines between Canada and the United States are already running at full capacity, and the upcoming pipelines could see huge volumes, too.
With Enbridge stock trading at its 2015 highs, I would be cautious, as the stock could fall when the oil bubble bursts. But the stock offers a 6.16% dividend. A $20,000 investment in Enbridge through the Tax-Free Savings Account (TFSA) could give you $3.4 a day in passive income.
TransAlta Renewables
Once the panic subsides and alternatives start generating energy, oil stocks could decline. But clean energy is in long-term growth. Governments are providing support for renewable energy projects.
TransAlta Renewables is benefitting from the clean energy trend. It has almost three GW of generating capacity online, and more projects are in the pipeline. The existing projects generate sufficient cash for the company to pay a 5.33% dividend yield. The company pays a monthly dividend. It has not increased its dividend since 2017, as it is reinvesting the money in acquiring wind and solar projects and developing new projects.
In 2021, TransAlta’s adjusted EBITDA was unchanged due to outages in the Canadian Wind segment. But it expects new acquisitions to grow its adjusted EBITDA by 9% in 2022. A $20,000 investment in TransAlta could earn you $2.9 a day in dividend income.
Slate Office REIT
My last pick is a small-cap REIT that earns rent from commercial offices. It gives an 8% dividend yield, but this is a premium for taking risks. An $8,000 investment can earn you $1.7 per day.
Bottom line
An initial investment of $48,000 in the above stocks can earn you $8/day in passive income.
