Every Canadian should aim to build streams of passive income. One of the easiest ways is to create a diversified portfolio of dividend stocks. You only need some savings and some knowledge of stock investing to get started.
Not all dividend stocks are suitable for passive income, though. You should only buy dividend stocks that offer safe dividends backed by a sustainable payout ratio and quality earnings. Furthermore, don’t overpay for stocks by being cognizant of the stock valuation.
Fortis stock for passive income
Fortis (TSX:FTS) stock has good characteristics of a dividend stock that could be a reliable source of passive income. You’ll notice that it has a strong history of dividend growth. Specifically, the regulated electric and gas utility has increased its common stock dividend for about half a century! For your reference, its 10-year dividend growth rate is 6.1%.
Since its payout ratio is estimated to be sustainable at approximately 74% of its adjusted earnings this year and its earnings are highly resilient through economic cycles, its dividend is safe. Investors can also expect dividend growth to continue.
In fact, Fortis’s growth profile and earnings are so predictable that management has extended its dividend growth guidance of 4–6% per year through 2028. This growth is supported by a $25-billion capital plan from 2024 to 2028, which will drive rate base growth at a compound annual growth rate of about 6.3%.
At $51.55 per share at writing, Fortis stock offers a dividend yield of almost 4.6%. The stock trades at about 17% below its 52-week high. It’s a good buy-the-dip opportunity in a defensive stock for long-term passive income investors. At this price, analysts believe the stock trades at a discount of about 12%.
Earn passive income from TD Bank stock
You can also earn passive income from Toronto-Dominion Bank (TSX:TD) stock with peace of mind. The big Canadian bank has paid dividends since 1857. If you do the math, that’s 166 years of dividend payments! Its 20-year dividend growth rate is 9.7%, which is quite good.
The bank primarily focuses on retail banking in North America. Currently, the North American economy is experiencing slower growth due to higher inflation and interest rates. In addition, economists forecast a higher risk of a recession in Canada and the United States by 2024. Along with its peers, the bank has to set aside a greater reserve for higher loan loss provisions, which has weighed on earnings.
This is why TD stock trades at a discount of about 15% from its long-term normal price-to-earnings ratio at $81.23 per share. At this price, it offers a nice dividend yield of 4.7%. The dividend payout ratio is estimated to be sustainable at about 47% of adjusted earnings this year. The bank typically captures a return on equity in the teens range in any given year.
Although TD stock is more or less sensitive to the ups and downs of the economic cycle, it is an excellent source of growing passive income. The idea is to accumulate shares when the stock price is down and the dividend yield is relatively high.