Everything is difficult at the beginning. The first step to building a passive-income portfolio is to save money. The Tax-Free Savings Account’s (TFSA) contribution limit this year is $6,500. It works out to be about $542 per month. It is a good gauge for the monthly savings new investors can target initially.
Once you get into the habit of saving and your passive-income portfolio starts rolling, your passive income will steadily but surely take off. Here are some potential dividend stocks that are suitable for new investors who are just starting to invest.
Fortis
Fortis (TSX:FTS) is a blue-chip stock you can rely on for passive income. As a diversified, regulated utility with operations across North America and with primarily distribution and transmission assets that provide essential services, it makes quality and resilient earnings. In other words, it’s a defensive business through economic cycles. It’s no wonder it has increased its dividend for about half a century!
Its three-, five-, and 10-year dividend-growth rates are approximately 6%. Fortis is so confident about its earnings predictability that it already projects dividend growth of 4-6% per year over the next few years. This growth is predominantly supported by low-risk projects.
Fortis pays out a quarterly dividend. The annual payout is $2.36 per share, which equates to a dividend yield of about 4.3%. At $55.33 per share, the top utility stock is fairly valued, trading at about 18 times earnings. Its payout ratio is estimated to be sustainable at about 75% of adjusted earnings this year.
Enbridge
Another utility-like business for passive income is Enbridge (TSX:ENB). It is a large North American energy infrastructure company with a massive liquids and natural gas transmission pipeline network. It’s a mature business that generates substantial cash flows, which allows it to pay out a large dividend yield of 7.7%. It has proven to generate durable and resilient cash flows over the decades, regardless of the volatility of commodity prices.
At $47.46 per share, analysts believe the stock is fairly valued. ENB stock pays out about 65% of its distributable cash flow to support its dividend. Investors should note that in recent years, Enbridge stock’s dividend growth has been about 3%. So, a fairly valued stock could deliver long-term total returns of roughly 10-11% per year.
Royal Bank of Canada
Royal Bank of Canada (TSX:RY) is another blue-chip dividend stock investors can rely on for passive income. It has a diversified business with revenues diversified across personal and commercial bank (about 39% of its fiscal 2023 revenues), wealth management (31%), capital markets (20%), and insurance (10%). This diversification makes it a more defensive bank.
Notably, the bank is a little sensitive to the ups and downs of the economic cycle. During recessions, its earnings are likely to decline, and the stock will fall. For example, during the pandemic year, its adjusted earnings per share fell about 12%. However, in the long run, it’s able to grow its profitability and dividends. The bank’s five-year dividend-growth rate is 7.3%. At $125.24 per share, analysts believe the bank is fairly valued and offers a safe dividend yield of about 4.4%.
Growing the passive income
These three stocks have an average yield of 5.47%. Let’s be conservative and assume a portfolio yield of 5%, growth of the portfolio by 4%, and that you continue to save and invest $6,500 a year. In the first year, you’d make $325 of passive income, which doesn’t seem much. In five years, you’d make $2,156 in passive income. In 10 years, it’d be $4,383. In 15 years, you’d make $7,093 in passive income that year. In 20 years, it’d be $10,390.
You can grow your passive income faster by saving and investing more. Typically, targeting lower-yielding but higher dividend growth can drive faster dividend growth over time.
