Nobody can time the stock market or say with surety how much your money will grow. The stock market runs on business dynamics where several factors work for and against a sector or company. You can pull out ample examples where the stock did not meet expectations or a stock significantly exceeded expectations. But that does not mean you don’t give your money a chance to sail through the market volatility. You can invest in dividend stocks and give your money a shot at generating $5,000 in annual passive income. Let’s see how.
How to build dividend expectations around a TSX stock
Dividends are relatively predictable compared to stock prices. A company pays its shareholders dividends from the cash left after servicing debt and capital expenditure. As an equity shareholder, you are the owner of the company and have a share in net profits.
To simplify it, let us assume you own a bakery that generated $150,000 in sales. You would use the money to pay the bills, suppliers, bank loan installment, advertising, and a new oven you wanted to buy to double production. And whatever cash is left is your bonus. While everyone else is getting a fixed amount, the owner is getting a variable dividend over and above his salary. And if your business is booming, you might as well grow your dividend and keep growing it.
Building passive-income expectations for this TSX stock
And that is what Telus (TSX:T) has been doing for 20 consecutive years. The management worked the math and concluded that it could pay 60-75% of its free cash flow (FCF) as dividends. And since its FCF has been growing with an increasing subscriber base and higher revenue per subscriber, it has been comfortably growing its dividend by 7-10% annually. The management expects a similar dividend growth from 2023-2025. But it also cautions investors, stating, “There can be no assurance that we will maintain a dividend-growth program or that it will be unchanged through 2025.”
Last year has been rough for companies with debt as the Bank of Canada’s decade-high interest rate diverted more cash flow towards interest payments, reducing FCF. Moreover, Telus accelerated its capital spending when capital was expensive. These factors reduced its FCF and inflated its third-quarter payout ratio to 88%.
The management can pause dividend growth as the payout is above the target. However, the company continued to grow its dividend. While the payout was way above its payout target, its debt levels of 3.82 times the operating profit were below the target of 4.25 times.
You can see how the company is juggling various angles to not let a short-term headwind of high interest expenses affect its 20-year dividend growth unless necessary.
Hence, I expect Telus’s dividend to continue growing at a slower rate of 6%. Once the 5G infrastructure work is over and smarter gadgets unleash 5G’s money-making potential, it could drive Telus’s stock price.
Buy 1,975 shares of Telus for a shot at $5,000 in annual passive income
Using the above assumptions, if you buy 1,975 shares of Telus for $24 a share, you will have to invest $47,400.
| Telus Dividend per share (6% CAGR) | Total dividend on 1,975 shares |
| $1.5152 | $2,992.45 |
| $1.6061 | $3,172.00 |
| $1.7024 | $3,362.32 |
| $1.8046 | $3,564.05 |
| $1.9129 | $3,777.90 |
| $2.0276 | $4,004.57 |
| $2.1493 | $4,244.85 |
| $2.2782 | $4,499.54 |
| $2.4149 | $4,769.51 |
| $2.5598 | $5,055.68 |
| $2.7134 | $5,359.02 |
If Telus continues growing dividends at 6%, the dividend per share could be $1.51 in 2024 and $2.71 in 2034. The 1,975 shares could grow your passive income from $2,992 to $5,055.
If you don’t have such a high amount to invest, you can invest $4,000 every year in Telus’s dividend-reinvestment plan (DRIP) option to buy 1,975 shares over 11 years.
