If you’re looking for quick cash, passive income can certainly be a great option. However, many Canadians continue to not include both returns and dividend income when looking at the right dividend stock for them.
That’s a key element here. Not only should you incorporate what could be planned returns for the future of your portfolio. You should also be including returns to demonstrate the health of your chosen dividend stock.
What to look for
Canadian investors can look to a few things if they want to discover whether they’re investing in a healthy dividend stock or not. First of all, is the dividend high because it has always been high? Or is it high because share prices have dropped? This could mean two things the latter case.
If a share price is lower, then the dividend yield could decrease as the dividend stock share price rises. That would be great! However, it could also mean a cut is coming for the dividend if the company doesn’t look like it will be able to keep up with payments.
A key to seeing if a company is going to cut is looking at debt-to-equity (D/E) and payout ratios. A healthy D/E ratio would show a stock has enough equity to cover all debts, with a D/E ratio under 100%. A payout ratio is considered healthy between 50% and 80%. This would mean the company is demonstrating attention to dividend payments, but not so much that it’s paying out too much dividend income without saving any earnings.
A dividend stock to consider
A company that falls right into this spot right now is Canadian National Railway (TSX:CNR). After losing out on the acquisition of Kansas City Southern, the company is practically overcome with cash. That’s despite having some rough winters, and missing out on growth opportunities.
Even so, many investors have argued that this was a good thing for CNR stock. After so much focus on growth, the company is refocusing on its roots. Those roots come down to becoming a precision railway, one that can focus on getting goods where they need to go, no matter what.
And it remains a safe option, with a safe dividend. The dividend stock currently holds a yield at 2.01%, so not all that high. Even so, its D/E ratio is low at 94%, with its payout ratio at 42%. This could therefore increase in the near future.
How much you could get
Then we also have to take into consideration the increase in share price that investors have seen. Shares may be down 8.5% in the last year, but this is a solid and growing company that’s part of the railway duopoly in Canada. So that’s not suddenly going to disappear.
Therefore, you can look forward to even more growth in the years to come. And in the meantime, you can still collect a ton of passive income for your investments. How much? Let’s say you’re an investor that has $5,000 to put towards CNR stock today. Here is what that could achieve in dividends and returns should it reach 52-week highs.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY | PORTFOLIO TOTAL |
| CNR – now | $158 | 32 | $3.16 | $101.12 | quarterly | $5,000 |
| CNR – highs | $175 | 32 | $3.16 | $101.12 | quarterly | $5,600 |
In just that short period, you could bring in $101.12 in dividends and $600 in returns. That’s a total of $701.12 in passive income! And keep holding, it’s only going to get higher from here.
