How to Generate $500 in Passive Income Each Month

If you have a long-term investment horizon, you can park your money in these three dividend stocks for nice passive income.

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Higher interest rates have triggered a selloff in dividend stocks because fixed-income investments are now better able to compete with dividend stocks for income investors’ capital. In the long run, carefully selected dividend stocks with quality businesses can outperform fixed-income investments because their returns and income potential depend on the underlying businesses.

Investors are now able to buy dividend stocks at good discounts. If you have a long-term investment horizon and can ride through market volatility, you can consider these attractive dividend stocks for income.

Get passive income from this renewable utility

Renewable utilities is a great place to invest with growth opportunities over the next few decades! And Brookfield Renewable Partners (TSX:BEP.UN) is at the forefront of it. It is one of the largest pure-play renewable power platforms you can find on the TSX.

Its portfolio is diversified across technologies and geographies. Its high-quality assets include hydro (52% of portfolio), wind (21%), solar (15%), and distributed energy and sustainable solutions (12%). Its operating capacity is about 24 gigawatts. In comparison, its development pipeline consists of 102 gigawatts, which represents abundant long-term growth. Currently, it has about 43% of its capacity in North America, 31% in South America, 17% in Europe, and 9% in Asia.

Since 94% of BEP’s cash flows are contracted, it’s been able to grow its portfolio while paying out higher cash distributions to its unitholders for over a decade! Its 10-year cash distribution-growth rate is 5.7%. Going forward, BEP can continue increasing its dividend by at least 5% per year.

Notably, the renewable energy stock pays a U.S. dollar denominated cash distribution that yields almost 5% at US$25.73 per unit at writing. Assuming a 5% increase based on its usual schedule in the first quarter, the forward yield is just north of 5.2%. The dividend stock is attractively valued. The consensus 12-month price target of US$39.16 across 11 analysts suggests a substantial discount of 34%, which can translate to near-term upside potential of 52%!

CIBC or BNS stock

The big Canadian bank stocks are also reliable for passive income. Currently, Canadian Imperial Bank of Commerce (TSX:CM) is a close tie with Bank of Nova Scotia (TSX:BNS) for the best-valued big Canadian bank stock. They both offer juicy dividend yields of just over 6.2%.

Both offer sustainable dividends with estimated payout ratios of about 50% in fiscal 2023. At $54.65 per share at writing, CIBC trades at a discount of about 21% from its normal long-term valuation. BNS stock trades at a steeper discount of 31% discount.

The analyst consensus 12-month price targets suggest near-term discounts of 13% and 15%, respectively, for CIBC stock and BNS stock.

The Big Six Canadian banks reported their earnings recently. Within the group, CIBC and BNS have the lowest Common Equity Tier 1 ratios of 11.7% and 11.5%, respectively, which suggests they may be higher risk for the upcoming expected recession in 2023. However, the ratio is still sufficient for the 11.0% target outlined by the Office of the Superintendent of Financial Institutions regulator.

How to generate $500 in passive income each month

All three stocks discussed pay out quarterly cash distributions or dividends. Below, I’ve converted BEP’s U.S. dollar-denominated cash distribution into Canadian dollars based on the recent foreign exchange rate between the two currencies.

Below, the dividend column displays the quarterly payouts. To generate passive income of $500 each month (or $6,000 per year) for each stock, here’s roughly how many shares you’d need to own.

COMPANYRECENT PRICENUMBER OF SHARESDIVIDENDTOTAL PAYOUTFREQUENCY
BEP.UN$34.963,450$0.43$6,000Quarterly
CIBC$54.671,765$0.85$6,000Quarterly
BNS$66.161,456$1.03$6,000Quarterly

If you want to earn $2,000 in passive income per year from each stock above, divide the number of shares to buy by three.

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 Kay Ng has positions in Bank Of Nova Scotia and Brookfield Renewable Partners. The Motley Fool recommends Bank Of Nova Scotia and Brookfield Renewable Partners. The Motley Fool has a disclosure policy.

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