Need Passive Income? Turn $5,000 Into $21 Every Month

Investing $5,000 in Exchange Income Fund will help you earn $250 in annual dividends. But is EIF stock a buy right now?

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Investing in fundamentally strong dividend stocks is a popular strategy, as it allows you to derive an alternative income stream. Long-term shareholders will benefit from a predictable payout each month or every quarter in addition to capital gains. While dividend payments are not guaranteed, the best companies not only maintain these payouts but also increase them each year.

As companies need to generate consistent profits to support the payments, dividend stocks have historically outpaced the broader markets over time. Keeping these factors in mind, let’s see why you need to invest $5,000 in Exchange Income (TSX:EIF) — a company that pays you a monthly dividend.

EIF stock has a dividend yield of 5%

Exchange Income went public on the TSX back in 2004, and the stock has since returned 517% to investors. After accounting for dividends, total returns are closer to a whopping 3,000%. Comparatively, the TSX index is up 325% in this period.

Despite its outsized gains, EIF stock currently offers investors a dividend yield of 5%. So, an investment of $5,000 in this TSX stock will help you earn $20.6 in monthly dividends, indicating annual payouts of almost $250.

In the last 15 years, EIF has increased its dividends by 5% annually. So, your annual dividend might double in 14 years if the company continues to increase its dividends by 5% each year.

Exchange Income$50.8798$0.21$20.6Monthly

Its strong balance sheet and diversified portfolio of subsidiary companies have allowed Exchange Income to increase dividends 16 times since 2004. It has paid over $700 million to shareholders in dividends as of 2022.

Exchange Income is an undervalued TSX stock

Exchange Income has increased its revenue base on the back of highly accretive acquisitions. These subsidiary companies are part of verticals such as aerospace, aviation, and manufacturing. This business model has allowed EIF to return 20% annually to shareholders, which is quite remarkable for an income vehicle.

Its market cap has grown from $8 million in 2004 to $2.2 billion today, while its enterprise value has grown from $20 million to $3.7 billion in this period. While acquisitions have allowed Exchange Income to expand its revenue and earnings, it continues to allocate cash flows toward capital expenditures and fuel organic growth.

In 2022, EIF increased sales by 46% year over year to $2 billion, while adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) rose 38% to $456 million. Adjusted net income grew by 55% to $133 million, and free cash flow stood at $332 million, an increase of 36% year over year. The company allocated more than $175 million towards capital expenditures and increased dividends twice in the last 12 months. Its dividend-payout ratio stands at a sustainable 58%, up from 55% in 2021.

Despite its market-thumping gains, EIF stock is attractively priced. It’s trading at one time forward sales and 13.4 times forward earnings. Comparatively, Bay Street expects its earnings to expand by 11.5% annually in the next five years.

EIF stock is trading at a discount to consensus estimates. Analysts expect the TSX stock to surge by 25% in the next 12 months. After accounting for its juicy dividends, total returns will be closer to 30%.

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 Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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