Inflation! This word affected every Canadian household last year as expenses ate up savings. Canada experienced an 8% inflation rate for the first time in 40 years. But it taught a valuable lesson. Everyone should have more than one source of passive income, retired or not. It also came as a reminder that the Canada Pension Plan (CPP) alone cannot take care of your daily expenses. When building your passive income portfolio, ensure it grows along with inflation.
Three dividend stocks to beat inflation
The inflation basket comprises housing, fuel, food, medical, utility, clothing, and other things an average Canadian household spends on. Canada’s average inflation rate is 3%, but medical and food inflation tends to grow faster. Thus, aim for stocks that give you a minimum of 3% dividend growth, and invest some of your money in stocks with higher dividend growth.
You could divide your investment as per your expenses. Let us understand how.
Telus Corporation (TSX:T) is riding the 5G wave. It can grow your passive income by 7% to 8% as the company increases its dividends twice a year. The management announces its dividend plan every three years. It plans to grow dividends in the range of 7% to 10% from 2023 through to the end of 2025.
You can invest the dividend income on expenses such as for your food and medicine in Telus. For instance, if you need $500 a month for food and medicine, plan your investments such that your annual dividend income from Telus comes to $6,000. The stock is trading closer to its low and offering a yield of over 6%. But you don’t have to invest $100,000 to earn $6,000 in annual dividends. You can invest $3,000 to $4,000 annually and gradually build your portfolio.
Telus’s 7% dividend growth, 6% dividend yield, and dividend reinvestment (DRIP) option can compound your returns and help you achieve $6,000 I passive income in a few years.
You can consider investing in Enbridge (TSX:ENB) to pay for your utility bills in the future. The pipeline operator has slowed its dividend growth to 3% from 9% in 2020. It grows its dividend by increasing its toll rates by adding new pipelines or broadening existing ones. The management targets to grow its dividend by 3 to 5% in the next five years.
Enbridge stock fell 11% in the last 12 months, inflating its dividend yield to 7.6%. Lock in a higher yield stock for larger expenses. If you plan your passive income based on your expenses, you will know how much you want. You can track your income and whether the stock is meeting your expectations.
If there are any gaps, CPP payouts and other investments can take care of it.
CT REIT (TSX:CRT.UN) is another good option for fuel costs and other needs. The REIT redistributes the monthly rental income it gets from parent Canadian Tire. It has been growing its dividend by 3% for a decade by increasing its rent and purchasing and developing new retail properties to earn higher rent. And the REIT keeps its payout ratio below 80%, assuring you that distributions are coming.
Now is a good time to invest in REITs, as the unit price trades at a discount due to falling property prices. CT REIT also offers DRIP to help you compound your passive income.
A 6%-to-7.5% yield won’t generate the desired passive income in a year. But small regular investments in these stocks over a decade with a DRIP can.
Good investing practices
Remember to diversify your passive income portfolio across different sectors so that weakness in one is offset by strength in others. And never rule out the possibility of a dividend growth pause or a dividend cut. Because, unlike bondholders, companies are not obligated to pay principal and coupon to shareholders. Companies share their gains and losses with shareholders through dividends and capital appreciation. If the company is in bad shape, dividend payments would be the first to take a hit.