Gone are the days when you could retire with a single source of income. At the rate at which technology is evolving, you need multiple income sources. Rather than retiring only on your Canada Pension Plan (CPP), build passive-income sources. While you work for money today, let the money work for you tomorrow.
How to use dividend stocks to earn passive income
Dividend stocks are range bound, as their stock price is adjusted for the dividend paid. You can use this feature to your advantage by buying dividend stocks from time to time when they trade closer to their lower range. This way, you can reduce your downside risk and lock in a higher dividend yield. (Dividend yield is the annual dividend amount as a percentage of the share price. When the share price falls, the yield rises.)
As dividend stocks don’t give growth by increasing stock prices, it makes investment sense to reinvest dividends to buy more income-generating shares.
The top dividend stock to earn passive income
TC Energy (TSX: TRP) has been paying a dividend since 2000 and growing it at a 7% compounded annual growth rate (CAGR). Last year, it started a dividend-reinvestment plan (DRIP). While TC still faces hiccups now and then with pipeline development, it is gradually getting to safer cash flows.
The company has been transitioning from oil pipelines to natural gas pipelines and has several gas pipeline projects ongoing. The management’s 2023 priorities are to divest US$5 billion worth of assets and use the proceeds to reduce debt. The company is laying off staff to enhance operating efficiency.
TC funds a significant portion of its projects with its operating cash flow and aims to grow its distributable cash flow (DCF) by 3-5%. The DCF is the amount TransCanada has left after servicing debt and capital spending. Its 23-year dividend-growth consistency assures investors of a stable source of passive income.
Its dividend growth has slowed to 3%, as it is investing aggressively in natural gas pipelines to tap North America’s liquefied natural gas export opportunity. I expect the company to accelerate its dividend growth in the next three years, as these pipelines come online.
How to earn $210/month in passive income from this dividend stock
TC stock hovers in the range of $50-$70. I did some calculations to determine how many TRP shares can earn you $210 in monthly passive income. Remember, the stock pays dividends quarterly, but you can control your withdrawals.
| Year | Average TRP Stock Price | Annual Investment | TRP Shares Purchased | Total Share Count | TRP Dividend per share (3% CAGR) | Total dividend |
| 2023 | $60.00 | $4,000.00 | 67 | $3.72 | ||
| 2024 | $60.00 | $4,000.00 | 67 | 134 | $3.83 | $512.16 |
| 2025 | $60.00 | $4,000.00 | 75 | 209 | $3.95 | $823.51 |
| 2026 | $60.00 | $4,000.00 | 80 | 289 | $4.06 | $1,173.41 |
| 2027 | $60.00 | $4,000.00 | 86 | 375 | $4.19 | $1,568.69 |
| 2028 | $60.00 | $4,000.00 | 93 | 468 | $4.31 | $2,016.81 |
| 2029 | $60.00 | $4,000.00 | 100 | 568 | $4.44 | $2,521.50 |
| 2030 | $60.00 | 42 | 610 | $4.58 | $2,789.30 | |
| 2031 | $60.00 | 46 | 656 | $4.71 | $3,089.75 | |
| 2032 | $60.00 | 51 | 707 | $4.85 | $3,429.99 |
If you buy TRP shares at an average price of $60, around $4,000 investment can buy you 67 TRP shares in 2023. Since half the year is gone, I have excluded any dividend income for 2023. If the stock maintains its 3% dividend compound annual growth rate, its dividend per share would be $3.83 in 2024, and 134 shares (67 shares from 2023 + 67 shares from 2024) could pay you $512 in annual dividends.
If you opted for the DRIP, you would get eight TRP shares instead of cash. If compounded for seven years, your DRIP plus $4,000 annual investment will buy you 568 TRP shares that pay $2,521.5/year, or $210/month in passive income. Without DRIP, you would have 469 TRP shares that pay $173.5 monthly passive income.
Compounding added 99 TRP shares and $36.5 in monthly passive income. If you stop investing $4,000 and let your money compound, you would own 707 TRP shares by 2032 that pay $285.8/month in passive income.
Investing tip
Invest in a DRIP through a registered savings account that allows your money to grow tax free, as dividends are taxable, even in a DRIP.
