Invest $7,000 in This Dividend Stock for $1,810 in Passive Income

Investing in cheap TSX dividend stocks such as Enghouse can help you derive outsized gains over time.

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A proven strategy to gain exposure to the equity markets is to invest in dividend stocks with a growing payout. Here, you need to buy shares of companies that are positioned to expand earnings and cash flows across market cycles. Due to a widening earnings base, the stock should also deliver capital gains in addition to a steady stream of recurring income.

One such TSX dividend stock is Enghouse Systems (TSX:ENGH), which currently pays shareholders an annual dividend of $1.04 per share, translating to a yield of 3.4%.

An overview of Enghouse Systems

Valued at $1.7 billion by market cap, Enghouse Systems develops enterprise software solutions globally. It has two primary business segments:

  • Interactive Management: It provides customer interaction software and services to facilitate remote work, enhance customer service, increase efficiency, and manage customer communications across voice, email, text, and video. These solutions include contact centers, video collaboration, interactive voice response, business intelligence, and analytics that may be deployed in private cloud, multi-cloud, or on-premise environments.
  • Asset Management Group: The business offers a portfolio of software and services to cable operators, network telecom providers, media, transit, defence, and public safety companies. Its products include network infrastructure, operations support systems and business support systems.

Is Enghouse Systems stock a good buy?

Enghouse’s revenue increased from $386 million in fiscal 2019 (which ended in October) to $454 million in fiscal 2023. In the last 12 months, its free cash flow per share has been $2.28, up from $1.84 per share in fiscal 2022. So, Enghouse has a payout ratio of 46%, which is sustainable across market cycles.

A low payout ratio and widening cash flows have allowed Enghouse to more than double its dividends in the last four years.

In the fiscal second quarter (Q2) of 2024, Enghouse reported revenue of $126 million, up 12% year over year, while adjusted EBITDA (earnings before interest, tax, deprecation, and amortization) stood at $35.7 million, up 12.7%.

In addition to organic growth, Enghouse Systems pursues selective acquisitions within existing markets while entering new strategic software markets. With $263.8 million in balance sheet cash, Enghouse Systems has the flexibility to target accretive acquisitions and drive future cash flows higher. Generally, Enghouse targets profitable companies that generate annual recurring revenue between $5 million and $50 million.

Analysts tracking ENGH stock expect adjusted earnings to expand from $1.31 per share in fiscal 2023 to $1.63 per share in fiscal 2025. So, priced at 19 times forward earnings, ENGH stock is quite cheap.

The Foolish takeaway

COMPANYRECENT PRICENUMBER OF SHARESDIVIDEND (Next 12 Month)CAPITAL GAINSTOTAL PAYOUT
Enghouse$30.91226$235$1,575$1,810

An investment of $7,000 in Enghouse stock should help you buy 226 shares of the company. Given its annual dividend of $1.04 per share, investors would earn $235 in dividends in the next 12 months. Further, the TSX stock trades at a discount of 22.5% to consensus price target estimates. If ENGH stock trades closer to its average price target, capital gains would total $1,575, bringing cumulative returns to $1,810 in the next 12 months.

Canadians can identify other cheap dividend stocks and diversify their portfolio further, which significantly lowers investment risk.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Enghouse Systems. The Motley Fool has a disclosure policy.

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