Investing in dividend stocks is one of my favourite strategies. That’s because, through those kinds of assets, investors can generate a steady source of passive income. In my opinion, it’s the passive income source with the lowest barrier to entry. In addition, it truly feels passive, whereas other methods of passive-income generation aren’t truly passive (i.e., rental properties), unless you hire someone to manage things for you, and that’ll eat away at your profits.
When looking for dividend stocks to hold in my portfolio, I tend to focus on Dividend Aristocrats. In Canada, these are stocks that have increased dividend yields for at least five consecutive years. What that tells me, when a stock is listed as a Dividend Aristocrat, is that its management team has great capital-allocation habits.
Another way of determining whether a company has great capital-allocation habits is by checking to see how successful it can pay its shareholders a dividend. For example, all things being equal, I would likely choose to invest in a dividend stock that has been paying its shareholders every year for the past 25 years over one that has only been paying shareholders for two years.
Finally, investors should look to buy shares of dividend stocks that have a dividend-growth rate of more than 2%. This is important because if a dividend stock isn’t capable of at least matching the long-term inflation rate, then you’ll be losing buying power over time.
What dividend stock am I buying?
For superior passive income, I’m buying shares of Fortis (TSX:FTS). This is a stock that I like very much. It’s a leader within the North American utility industry. In fact, Fortis serves more than three million customers across Canada, the United States, and the Caribbean. Fortis’s services include providing regulated gas and electric utilities.
A bona fide Canadian Dividend Aristocrat, Fortis has increased its dividend distribution in each of the past 50 years. To put that into perspective, consider how many negative events have happened in the stock market over that period. For example, the COVID-19 pandemic and the Great Recession come to mind. Through all of those events, Fortis has managed to allocate capital in a way that allowed them to continue raising dividends.
What makes Fortis’s dividend-growth streak even more impressive is that the next longest dividend-growth streak (in Canada) is nearly two decades shorter.
Fortis has already announced its plans to continue raising its dividend at a rate of 4-6% over the next four years. That could help investors stay ahead of inflation for years to come.
Foolish takeaway
If you’re interested in passive income, then my suggestion would be to take a look at dividend stocks. In particular, dividend stocks with the ability to raise distributions over time have a long history of consistent dividend payments and a high dividend-growth rate should be focused on. A company like Fortis would be a great one to look into, and it is certainly a stock I’m buying for passive income.
