You don’t need a tonne of upfront capital to build a stock portfolio that yields a substantial amount of cash. By utilizing the principals of compounding returns, even a modest principal investment can become a substantial passive-income portfolio.
Let’s say you are only starting with $20,000 to invest. You could potentially earn as much as $3,367 of passive income per year. Now, that is a 16.8% dividend yield. That is an unreasonably good income return. It almost sounds like a scam. But it is not.
How turn $20K into $3,367 of annual income
Rather, it is the combination of smart dividend stocks, dividends re-invested, and dividend growth over long periods of time. If you put that $20,000 equally into four top Canadian dividend stocks that have an average yield of 4.6%, you would earn around $920 of dividends in your first full year of investment.
If you keep those stocks in a tax-free registered account (like a Tax-Free Savings Account), you can keep all your income and re-invest the dividends into those same stocks. The more income you earn, the more stocks you buy and own, and the more income you will earn.
Let this process work over five years, and you could go from $920 of annual income to $1,587 of annual dividend income. Give your portfolio 10 years to compound, and you could be earnings as much as $3,367 of annual income. Re-investment and compounding can really create significant wealth if you are willing to be patient and think long term.
If you wanted to mimic this strategy, four easy-to-find Canadian dividend stocks to consider owning are TELUS (TSX:T), Brookfield Infrastructure Partners (TSX:BIP.UN), Canadian Natural Resources (TSX:CNQ), and Toronto-Dominion Bank (TSX:TD).
A defensive dividend-growth legend
TELUS is the perfect example of top stock to hold for long-term dividend compounding. It pays a 4.6% dividend yield today. This top Canadian telecom stock has grown its dividend by an 8% compound annual growth rate (CAGR).
While the telecom business isn’t a fast-growing business, it is fairly consistent and predictable. People need cell coverage and internet as much as electricity. Demand will always be there.
TELUS has differentiated itself from peers by investing in a diverse array of digital services businesses. This could provide another leg of growth over the long term. The company is pulling back infrastructure spending and it expects to earn outsized levels of cash. It continues to project 7-10% annual dividend growth for the next few years.
An infrastructure stock for dividend compounding
Brookfield Infrastructure is another great stock for dividend growth. This company operates a diverse mix of crucial infrastructure assets. It’s a steady-as-it-goes business that generates a lot of cash.
Brookfield has balanced smart acquisitions with returning growing dividends to shareholders. This gives it a great total-return outlook. This stock yields 4.4% today. It has grown its dividend by an 8.3% CAGR over the past 10 years.
An energy stock with two decades of dividend growth
Canadian Natural Resources is perhaps one of the least-respected dividend-growth stocks in Canada. It has increased its dividend by over a 20% CAGR for 23 years. Sure, the company is a cyclical energy stock, but it runs its company with factory-like efficiency.
Canadian Natural is known for its exceptional capital allocation, low cost of production, decades-long energy reserves, and high insider ownership. Today, this stock yields 4.4%, and it would be a great bet for a $20,000 portfolio.
A beaten-down financial with an elevated yield
Toronto-Dominion Bank also has a very long history of dividend growth. It has a 166-year history of continuously paying a dividend. Likewise, it has been growing its dividend annually since it listed in 1995.
Now, given the current economic environment, TD stock does have some risks. The market is worried about the economy and its exposure to the United States. Yet you get the stock at a very attractive valuation and an elevated dividend yield of 4.7%. Over the past 10 years, TD has grown its dividend by an 8.8% CAGR.