Because of relatively high inflation, the Bank of Canada have rapidly increased the policy interest rate since 2022. The policy interest rate stands at 5% currently. Higher interest rates have resulted in higher borrowing costs for Canadians, particularly those with variable interest rate debt.
It would be helpful to generate juicy passive income that can help offset higher interest expenses. Before we go into a dividend example of how much needs to be invested to make $1,000 per year in passive income, let’s go into these other considerations first.
Is the dividend safe?
The higher the dividend yield of a stock, the less you’d need to invest to earn $1,000/year of income. The catch is that high yields may not be safe. In other words, it’s possible they would experience a cut. Other than that, the dividend growth may also be below average. So, income investors need to dig into high-yield stocks they’re interested in to determine the dividend safety and whether they’re a good fit for your diversified portfolio.
Let’s take Enbridge (TSX:ENB) as an example. Having a track record of dividend increases is a good sign. Enbridge has increased its dividend for about 27 consecutive years. As a large energy infrastructure company with diversified cash flows from different customers that are largely investment grade, its cash flow tends to be stable through the economic cycle.
Interested investors should note that Enbridge currently targets a payout ratio of 60-70% of its distributable cash flow. So far, it has reported three quarters of results this year. During this period, it reported distributable cash flow of $8,535 million and paid out $5,650 million in dividends, resulting in a sustainable payout ratio of approximately 66%.
For now, management estimates distributable cash flow per share to grow by about 3% per year through 2025. So, its near-term dividend growth should also be around that range to be sustainable. Post 2025, perhaps in a lower interest rate environment, Enbridge expects its distributable cash flow per share growth to bump up to about 5% per year, which could also boost its dividend growth.
Keeping your capital safe
As Warren Buffett said, “Price is what you pay. Value is what you get.”
Investors should target to buy stocks at a discount to their intrinsic value, which helps protect their capital. Of course, it’s easier said than done. Businesses and the world are dynamic, so stock valuations change all the time. A recent example is higher interest rates have generally triggered lower valuations in stocks.
According to TMX, Enbridge has a 12-month analyst consensus price target of $50.03 per share. At $45.72 per share at writing, the stock is considered to be fairly valued.
Generally, investors also want to own businesses that have manageable debt. You can compare a company’s debt ratios to those of its peers to see if it’s overleveraged. Dividend stocks with underlying companies that are overleveraged may have trouble servicing their debt, which could trigger a cut in their dividends.
Because of the nature of the business, Enbridge has substantial debt on its balance sheet. Thankfully, its debt appears to be manageable. It has a debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization) ratio of approximately 4.5 times, which is at the low end of its target range of 4.5 to five times.
Earnings or cash flow growth is something to look out for, as it can help protect your capital. Higher growth is generally better than lower growth, but higher-growth stocks typically trade at a higher valuation. Year to date, Enbridges’s distributable cash flow rose by about 2.6%. On a per-share basis, the growth is 2.2% because of a higher share count.
Making $1,000/year from Enbridge stock
Based on the latest information, investors need to invest about $12,893 in Enbridge stock to generate $1,000 of annual passive income.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY |
| ENB | $45.72 | 282 | $0.8875 | $1,000 | 4 |
Notably, according to its usual dividend-hike schedule, Enbridge should increase its dividend by early December. Assuming a 3% dividend hike, investors would only need to buy 274 shares or invest about $12,527 to generate passive income of $1,000/year.
