Investing in dividend stocks with monthly payouts can help individuals begin a passive income stream at a low cost. However, before investing in dividend stocks, you should understand that the distributions can be revoked or suspended at any time, especially if the company’s financials deteriorate.
For instance, several banks south of the border were forced to stop dividend payments during the financial crash of 2008–09. Similarly, energy stocks such as Suncor reduced dividends when oil prices fell off a cliff at the onset of the COVID-19 pandemic. In the last 18 months, capital-intensive companies such as Algonquin Power & Utilities and Northwest Healthcare have cut their dividends to accommodate higher interest rates and inflation.
Before investing in dividend stocks, you need to ensure the companies have strong fundamentals and sustainable payout ratios. Ideally, these companies should have a growing earnings base, providing them with enough room to reinvest in growth projects, lower balance sheet debt, target accretive acquisitions, and raise dividends.
Moreover, in addition to the dividend yield, you need to analyze if the company is positioned to grow its cash flows across market cycles and raise its distributions each year, increasing the yield-at-cost by a significant margin over time.
Invest in blue-chip TSX dividend stocks
There are several dividend stocks trading on the TSX that offer investors a tasty dividend yield. One popular TSX dividend stock is Enbridge (TSX: ENB), which pays shareholders an annual dividend of $3.66 per share, indicating a yield of 7.73%.
Enbridge is part of a cyclical sector, but its widening base of cash-generating assets has allowed it to increase dividends by 10% annually since 1995. Its cash flows are predictable and indexed to inflation, making it relatively immune to the volatility associated with oil prices.
In addition to a constant stream of recurring income, long-term shareholders will also benefit from capital gains. Priced at 17 times forward earnings, ENB stock trades at a discount of 12.5% to consensus price target estimates.
Invest in monthly dividend ETFs
Identifying quality dividend stocks consistently is not easy, especially for beginner investors. Additionally, most dividend companies in Canada distribute dividends every quarter rather than every month.
So, investors can instead consider buying shares of monthly dividend ETFs, or exchange-traded funds, such as the iShares Core MSCI Canadian Quality Dividend Index ETF (TSX: XDIV). The ETF pays shareholders a monthly dividend of $0.13 per share, indicating a forward yield of 6%.
The XDIV ETF was launched in June 2017 and has since returned 30% to shareholders. After adjusting for dividends, total returns are closer to 74%.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY |
| XDIV | $26.08 | 383 | $0.13 | $49.79 | Monthly |
Typically, an ETF holds a basket of companies across multiple sectors, providing you with diversification and lowering portfolio risk. The XDIV ETF holds 17 stocks across sectors such as financials, energy, utilities, communications, materials, and consumer discretionary.
An investment of $10,000 in the XDIV ETF will buy you 383 units of the fund and earn you almost $50 each month in dividends. If dividends increase by 10% annually, your payout will double in the next seven years.
