Editor’s note: A previous version of this article overstated how much money you’d need to invest in Royal Bank of Canada to get $500/month in dividends. The error has been corrected.
The higher the yield you can get from your investments, the less you need to invest to get $500 of income every month. Just remember, there’s always a tradeoff, though. For example, when you’re earning a high yield on an investment, the company might have slower growth, or it could potentially cut its dividend.
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A high-yield stock example
Sienna Senior Living (TSX: SIA) owns and operates seniors’ living residences in British Columbia, Saskatchewan, and Ontario. At $10.72 per unit at writing, the undervalued stock offers a mesmerizing dividend yield of 8.7%.
If the company is able to maintain its monthly dividend, investors need to invest only about $68,726 to earn $500 every month. Sienna pays out eligible dividends that are favourably taxed in non-registered accounts.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT (ANNUAL) | FREQUENCY |
| SIA | $10.72 | 6,411 | $0.078 | $6,000 | 12 |
Sienna has maintained or increased its dividend since at least 2010. The stock has sold off because the market senses the dividend might be in danger. The company reported in February that its 2022 payout ratio was 99.3% versus 86.3% in 2021. This uncomfortably high payout ratio leaves little wiggle room.
Other than improving its retirement and long-term-care occupancy year over year, it also increased its adjusted revenue. However, its same-property net operating income declined 6.7%, while its adjusted funds from operations (FFO) per share fell 13%. It partly had to do with higher costs that are expected to continue into this year. Furthermore, its number of outstanding shares also increased, which diluted the FFO generated per share.
Currently, analysts believe the stock is discounted by about 21%. This means the stock has the potential to climb 27% over the next 12 months.
Typically, dividend stocks with lower yields have safer dividends and better dividend-growth potential than higher-yielding stocks. Here’s an idea.
RBC stock example
Royal Bank of Canada (TSX: RY) stock offers about 54% less income than the same investment in Sienna Senior Living stock right now. However, RBC investors can have a better peace of mind.
Royal Bank has leading positions in the financial services it offers. It also heads a diversified business across personal and commercial banking, wealth management, capital markets, insurance, and investor and treasury services.
Importantly, the quality bank stock has increased its dividend over time, even though it might have to freeze its dividend during recessionary times. For reference, its 15-year dividend-growth rate is 6.9%, which beats the long-term inflation rate of about 2%.
At $130.55 per share at writing, RBC offers a dividend yield of just over 4%. And this is eligible dividend income you can rely on to grow over time. The bank stock pays out dividends quarterly. So, investors need to invest about $148,435 today to earn $500 a month.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND (PAID EACH QUARTER) | TOTAL PAYOUT (ANNUAL) |
| Royal Bank | $130.55 | 1,137 | $1.32 | $6,000 |
The quality stock hardly goes on sale. Right now, it’s fairly valued.
The investor takeaway
Don’t just buy one or two stocks and be done with it. Remember to pick stocks wisely and diversify your portfolio across a basket of quality investments, which might include dividend stocks, growth stocks, exchange-traded funds, bonds, etc.
