It is a defining moment for TSX. Interest rates have stabilized and are likely to reduce next year. All dividend stocks that fell throughout the interest rate hike could reverse their course and begin to grow next year. Now is a good time to invest a large amount in these stocks, as dividend yields are above 7%. A 7% yield can convert a $20,000 investment into $1,400 annual passive income.
How much is the difference between a 6% and 7% dividend yield?
In the growing stock market, the highest average yield among Dividend Aristocrats is 6%.
Dividend yield = Annual dividend per share/share price
BCE (TSX:BCE) is a good dividend stock with over 40 years of no dividend cuts and 13 consecutive years of 5% dividend growth. The telco’s stock price fell 30% throughout the interest rate hike from April 2022, when the stock traded above $73, to December 2023, when it traded below $52. This $21 stock price difference can have a significant impact on your dividend income. Let’s see how.
| BCE Stock Price | Number of shares | Dividend Per Share | Total Dividend amount | Dividend Yield |
| $52.00 | 385 | $3.87 | $1,489.95 | 7.44% |
| $60.50 | 331 | $3.87 | $1,279.34 | 6.40% |
| $73.00 | 274 | $3.87 | $1,060.27 | 5.30% |
If you invest $20,000 today, you can buy 385 BCE shares, which pay a $3.87 annual dividend per share. It means you can lock in a 7.44% dividend yield. Notice that the dividend per share remains the same. However, a change in share price is affecting the dividend yield. Once you buy the shares, you lock in the cost per share and the dividend yield, unless the company slashes or increases dividends.
At $3.87 a share, 385 shares can give you $1,490 in annual dividends. And if BCE continues to grow dividends at 5%, your annual income could grow faster than inflation.
Had you invested $20,000 in BCE shares when they traded at their all-time high of $73, you would have got only 274 BCE shares and locked in $1,060 in annual dividends. Here, you get 111 fewer shares and 2.1% less yield or $430 less annual dividend.
You can minimize this opportunity cost by buying more BCE shares at the dip, reducing your average cost and increasing your dividend yield.
Stocks that can convert $20,000 into $1,500 every year
The time is ripe to invest in dividend stocks and lock in higher yields for decades. And some of these stocks even grow their dividends. If BCE continues growing its dividends at an average annual rate of 5%, the $1,490 dividend income can increase to $2,311 in 10 years.
Like BCE, CT REIT (TSX:CRT.UN) and Enbridge (TSX:ENB) stocks are offering a high dividend yield of 6.15% and 7.65%, respectively, because of a dip in stock price. If you invest $10,000 in each of the two, you can lock in a dividend yield of over 7%. They have also been growing their dividends at an average annual rate of 3%.
CT REIT is my pick because it has the backing of its parent and its biggest tenant, Canadian Tire. CT REIT is the landlord for most Canadian Tire stores. While other real estate investment trusts (REITs) face the risk of lower occupancy, it is minimal for CT REIT, as over 90% of its stores are occupied by the retailer. Hence, CT REIT enjoys all the benefits of real estate while minimizing the risks that come with it. The pandemic and the current property bubble did not affect its distributions, while many retail and office REITs slashed distributions.
Investor takeaway
Diversifying your $20,000 into two or three dividend stocks can help you reduce concentration risk. The telecom, energy infrastructure, and real estate sectors have some similarities. They have significant capital expenditure requirements but enjoy stable cash flows. Their stock price is range-bound, as any new growth needs huge capital spending, reducing the upside. Energy stocks can be a good hedge against inflation, while real estate can give asset diversification.
