The stock market has something for everyone. Many new investors get disappointed with dividend stocks, as they give low dollar-amount returns in the short term. For instance, a $100 stock with an annual dividend yield of 6% gives you $6 income in a year with little growth in the stock price. A $6 amount might look like a drop in the ocean. But dividend stocks can give you $200 a month in passive income for every $200/month invested if you use the power of compounding. Let’s see how.
Invest $200 per month and earn $200 in passive income
To earn $200 per month, you need $2,400 in annual dividend income. Most Canadian dividend stocks give an average dividend yield of 5%. You have to invest $50,000 to get $2,500 in annual dividends. If you don’t have $50,000 upfront, there is a way to work around it. You can get $2,500 in annual income tax free by investing $200/month in your Tax-Free Savings Account.
Time is money, and an investor knows better than anyone the value of time. If you invest $200/month in a dividend stock that pays a 5% stagnant dividend yield, you can reach the $200/month goal in about 20 years. But you can halve the time by investing in stocks that grow their dividend by an average annual rate of 5% and reinvesting the money to buy more stocks.
You are well aware by now how inflation reduces the purchasing power of a dollar. So, instead of collecting dividends now, if you put it to work by reinvesting in stocks, you can compound your returns. All this might look like a lot of work, but there are some stocks that automate it through dividend-reinvestment plans (DRIP).
Two stocks that can generate $200 in passive income every month
Canada is well known for its energy sector. Oil stocks are not quite strong with regular dividend payments, but pipeline stocks are.
TC Energy stock
Although Enbridge rules the pipeline business, TC Energy (TSX:TRP) is also a good investment. The stock fell 10% this week after it announced a significant increase in the cost of the delayed Coastal GasLink pipeline first announced in 2018. The company has increased its 2022 capital expenditures to $9.5 billion from $7.07 billion and 2023 earnings growth expectations to 5-7%.
The company took a hit in 2021 when Joe Biden’s rejection forced TC Energy to cancel its multi-billion-dollar Keystone XL Pipeline project. Despite that, it increased its dividend per share by 3% in 2022.
TC Energy’s chief executive officer stated that the company could sustain a 3-5% annual dividend growth, despite an increase in project cost. The pipeline company has been paying regular quarterly dividends and increasing them at a compound annual growth rate (CAGR) of 7% in the last 22 years. The recent 10% dip has inflated the dividend yield to 6.12%, but its five-year average dividend yield is slightly above 5%.
TC Energy started DRIP in July 2022. Assuming the company grows its dividend by 5% every year for the next 13 years, a $200 monthly investment plus DRIP can increase your share count to 546 shares. If the company increases its dividend at 4% CAGR to $4.45 per share, your 546 shares can give you $2,430 in annual passive income by 2035.
Canada’s telecom giant BCE (TSX:BCE) is a great dividend investment. It will benefit from higher 5G subscriptions. The fifth-generation technology will go beyond mobile and provide internet to all artificial intelligent (AI) edge devices. The higher device count and higher subscription amount will bring more cash flows to BCE and help it sustain its 12-year-long 5% dividend CAGR.
Its free cash flow surged 13.4% in the third quarter, as its three-year capital-acceleration program nears its end. BCE has a five-year average dividend yield of 5.5%, and its current yield is 5.7%.
Never leave the fate of your passive income on just one stock. An individual stock carries a high risk, and 10-13 years is a long time. A lot can happen in favour or against a particular sector and a company. Hence, diversify your investment in another sector.