How to Invest $10,000 to Create Reliable Passive Income

Although Bank of Nova Scotia stock can continue to be pressured in the near term, you can start with a yield of 6.1% today.

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So, you have $10,000 of excess cash that you don’t need for the long term (that is, ideally five years if not longer)? You can consider investing it for reliable passive income in solid dividend stocks. There are multiple aspects to consider, including dividend yield and dividend growth. Needless to say, you must focus on stocks that provide safe dividends.

Dividend yield

Bank of Nova Scotia (TSX:BNS) stock seems to persistently trade at a discount to its big Canadian bank peers. Sure enough, after reporting its fiscal first-quarter (Q1) earnings results yesterday, the stock declined 5.7% on the TSX. That’s a meaningful decline in a single day for the shares.

Specifically, the international bank witnessed a revenue drop of 1% to $7.98 billion, while expenses climbed 6% to $4.44 billion. This resulted in adjusted earnings per share falling 14% to $1.85.

Its Canadian Banking segment contributes the most to it top and bottom line, but even this segment saw weakness with adjusted net income falling 10% to $1.09 billion. It noted a normalization of provision for credit losses (PCLs).

Essentially, the bank is setting aside more cash to counter higher uncertainty in the economy. Specifically, Bank of Nova Scotia reported that the PCL as a percentage of average net loans and acceptances was 0.33% for the quarter versus 0.13% a year ago. The PCL on impaired loans was 0.29% versus 0.24% in fiscal Q1 2022.

The weakness provides a buying opportunity for investors who seek juicy passive income. Currently, you can scoop up shares for a dividend yield of 6.1%. The bank remains highly profitable and has the capability to keep its dividend safe. Its recent payout ratio was sustainable at about 53% of earnings.

Dividend growth

In the past 10 years, BNS stock increased its dividend at a compound annual growth rate of almost 5.9%. It’s possible for it to continue growing its dividend by about 5% per year over the next five years. Notably, the growth won’t be smooth with 5% increases every year. For example, in the past 10 fiscal years, it increased its dividend from 0% to 12.8% per year.

At times of high uncertainty in the economy, the regulator (Office of the Superintendent of Financial Institutions or OSFI) would restrict big Canadian bank stocks like BNS from buying back their common shares as well as from increasing their dividends so as to fortify their financial position.

When the economy improves, OSFI would lift this restriction and allow them to repurchase shares and hike their dividends. This is why we saw the bank freezing its dividend during the pandemic, even though it had more than enough earnings to make a dividend hike.

Food for thought

Since the operating environment changes over time, you should still review the passive-income stocks you own once a year to see if the underlying businesses are still moving in the direction that fits your investment goals.

If it makes sense for the size of your portfolio, you might invest $10,000 in BNS stock for reliable passive income. If you only have a $10,000 portfolio, you should diversify across potentially 10 of the best Canadian stocks when they’re on sale. Otherwise, start building your wealth with market-wide exchange-traded funds like SPDR S&P 500 ETF Trust to spread your risk.

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 shares in Bank of Nova Scotia. The Motley Fool recommends Bank Of Nova Scotia. The Motley Fool has a disclosure policy.

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