The Smartest Canadian Stocks for Steady Passive Income

Trying to find reliable passive income and capital upside? Check out these 3 smart stocks for steady long-term returns.

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Canada is full of stocks that generate passive income through dividends and distributions. However, just because a stock pays a dividend doesn’t necessarily mean it can afford to do so.

Canada has many high dividend-paying stocks. However, it also has many stocks that recently cut or eliminated their dividend (Algonquin Power, TransAlta Renewables, Corus Entertainment, True North Commercial REIT, and Northwest Healthcare REIT, to name a few).

For passive income, choose quality over quantity

While a high dividend stock (7–12%) may be appealing for its immediate elevated cash returns, it may not be the safest investment over a longer period. If you want steady passive income and solid capital returns, you are better off looking for stocks with a smaller, well-covered dividend yield.

The best dividend stocks are those that consistently grow their earnings and cash flows per share so they can justify growing their dividends as well. If you are looking for stocks that pay steady (and hopefully growing) passive income, check out these three today.

Real estate for monthly passive income

Real estate tends to be a good bet for stable monthly passive income. However, that thesis has been somewhat challenged in a rising interest rate environment.

As a result, it is crucial to look for real estate investment trusts (REITs) with good management, attractive assets, growing rental rates, and safe balance sheets. One of my top picks in the space is Granite REIT (TSX:GRT.UN).

Granite has a portfolio of institutional quality manufacturing and logistics properties. The REIT’s properties are very smartly located in some of the top markets for industrial property demand. Despite a recent slowdown in the real estate sector, it continues to see 20%-plus rental rate growth on new leases and renewals.

Granite’s balance sheet is in pristine condition with a 32% net leverage ratio. Its 4.7% dividend yield is sustainable with a 73% payout ratio. GRT.UN just increased its distribution for the thirteenth consecutive year. For monthly income, it’s hard to find a better bet today.

Tech for income and upside

Enghouse Systems (TSX:ENGH) may not pay a large dividend (2.6% yield), but it looks like a good bet for reliable passive income and capital upside.

Enghouse provides essential communications, network, and transportation technology solutions. The company tends to generate a lot of cash from these businesses (between $20–25 million per quarter). The stock has a free cash flow yield of 6% right now.

It also happens to be sitting on a net cash pile of $250 million. The company has traditionally grown by consolidating smaller tech businesses.

With valuations pulling back in 2023, it could have more opportunities to deploy that cash into growth opportunities. It has grown its annual dividend by a 19% compounded annual rate for the past five years.

A safe stock with decades of dividends

One of the GOATs (greatest-of-all-time) for steady passive income is Fortis (TSX:FTS). This year, it joined a handful of elite Canadian stocks that have consecutively increased their dividend for more than 50 years.

Fortis has very stable operations. Ninety-nine percent of its business is regulated, so its earnings and cash flow stream tend to be predictable. The company is diversified across 10 utilities that are spread across various geographies, so its operational risk is spread out.

The company is investing around $5 billion per year in low-risk capital projects. It hopes to generate 5–6% growth in annual earnings, while also growing its annual dividend by 4–6%.

This passive income stock yields 4.3%. It has a strong balance sheet, great assets, a conservative management team, and a clear plan for steady growth in earnings and passive income.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Robin Brown has positions in Enghouse Systems and Granite Real Estate Investment Trust. The Motley Fool has positions in and recommends Enghouse Systems. The Motley Fool recommends Fortis, Granite Real Estate Investment Trust, and NorthWest Healthcare Properties Real Estate Investment Trust. The Motley Fool has a disclosure policy.

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