Many investors avoid investing in stocks, as there are no guaranteed returns. Even the safest stocks could falter if the business and economic situations change. Equity shareholders are owners of the company and bear business risk. But they also enjoy windfall profits during strong business momentum. Hence, stocks can be a good way to generate returns.
A dividend superstar for passive income
A dividend superstar like BCE (TSX:BCE) can be relied upon for inflation-adjusted passive income. It has a +40-year history of paying regular dividends without dividend cuts. The management aims to sustain their payouts in all business cycles. Hence, they do not go overboard with payouts during upcycle and reserve cash to sustain payouts during downcycle.
Despite a robust plan, a company may cut dividends in a prolonged downturn as preserving cash becomes a priority. BCE has been growing its dividend annually for the past 14 years. It moderated its dividend-growth rate from 14% in 2010 to 5% in 2015 and maintained this rate for nine straight years. However, BCE did not grow its dividend in 2024 due to its high leverage and capital spending. It could return to its 5% dividend growth next year when interest rates fall.
While you can’t be sure about the stock market returns, you can make educated assumptions and estimate the passive income your investments can generate. I took BCE because of its stable and sustainable business model, as the 5G ecosystem develops over the next 10 years.
I assume that BCE will maintain its 5% dividend-growth rate and 3.2% stock price growth over the next 10 years. With these assumptions, you need 1,729 shares of BCE to earn $10,300/year in passive income after 10 years.
How to earn $10,300/year in passive income
You can buy 1,729 shares in one go if you are nearing retirement and have sold some growth shares. BCE stock is trading above $55. Those 1,729 shares will cost around $96,000. In such a scenario, you can start getting $6,690 from 2024 onwards and grow it to $10,300 by 2033.
You can get a similar outcome by 2033 but with only $40,000 total investment evenly spread across 10 years. BCE offers a dividend-reinvestment plan (DRIP), under which it reinvests the dividend amount to buy more shares of BCE without any brokerage involved.
So, you invest $4,000 annually in BCE through your Tax-Free Savings Account (TFSA), and the company reinvests the total annual dividend, thereby increasing your invested amount. Let’s understand this with some estimated numbers.
The math of compounding returns through DRIP
| Year | BCE Stock Price 3.2% CAGR* | Annual Investment | BCE Share count | Total Share Count | BCE Dividend per share (5% CAGR) | Total annual dividend |
| 2024 | $55.00 | $4,000.00 | 72 | 72 | $3.87 | $278.64 |
| 2025 | $56.76 | $4,278.64 | 75 | 147 | $4.06 | $598.88 |
| 2026 | $58.58 | $4,877.52 | 83 | 231 | $4.27 | $984.10 |
| 2027 | $60.45 | $5,861.63 | 97 | 328 | $4.48 | $1,467.72 |
| 2028 | $62.39 | $7,329.34 | 117 | 445 | $4.70 | $2,093.75 |
| 2029 | $64.38 | $9,423.10 | 146 | 591 | $4.94 | $2,921.36 |
| 2030 | $66.44 | $12,344.46 | 186 | 777 | $5.19 | $4,030.99 |
| 2031 | $68.57 | $16,375.44 | 239 | 1016 | $5.45 | $5,533.03 |
| 2032 | $70.76 | $21,908.48 | 310 | 1326 | $5.72 | $7,579.94 |
| 2033 | $73.03 | $29,488.42 | 404 | 1729 | $6.00 | $10,383.24 |
Let’s say you invest $4,000 today and get 72 shares of BCE. These shares give you $278 in dividend income by January 2025. Next year, you add another $4,000, and BCE adds the $278 dividend amount. With $4,278, you buy 75 more shares at $56.76/share, increasing your share count to 147.
As your number of shares grows, your dividend amount compounds while your dividend per share also grows. On a $40,000 investment from your side, BCE invests around $35,800. At the end of 2033, you own shares worth around $126,000 ($73 x 1,729 shares) and earn $10,300/year in passive income.
In the above example, I reinvested dividends annually for ease of calculation. The actual number could be higher, as dividends are reinvested quarterly. It could also be lower if BCE’s dividend-growth pause is prolonged.
Investor takeaway
While BCE is a good stock, diversify your passive-income portfolio across various sectors to reduce industry-specific risk.
