Canadian investors looking to create a recurring stream of passive income should consider investing in fundamentally strong dividend stocks. Historically, dividend-paying companies with a growing yield have delivered outsized gains to shareholders over time. While the TSX index has plenty of dividend stocks, it is essential to identify companies that are positioned to maintain these payouts across business cycles.
Basically, investors need to shortlist companies that have a sustainable payout ratio, a widening earnings base, and a strong balance sheet that will translate to inflation-beating returns in the upcoming decade.
Moreover, a company’s dividend yield is inversely related to its share price. In the last two years, companies part of capital intensive sectors such as energy, real estate, and infrastructure have trailed the broader markets, as investors are worried about interest rate hikes and the high cost of debt.
With interest rate cuts on the horizon, the time may be ripe to once again consider these beaten-down stocks and benefit from a high dividend yield in the process. Further, as the macro economy improves, investors should grow their cumulative returns due to share price appreciation or capital gains.
In order to make $750 per month or $9,000 per year, investors would need to invest $180,000, given an average yield of 5%. If you hold dividend stocks with an average yield of 6%, your investment would be lower at $150,000.
Among the most popular TSX dividend stocks in the last two decades is Enbridge (TSX:ENB), which currently offers an annual dividend of $3.66 per share. So, if you want to earn $9,000 per year, you would need to buy 2,459 shares of the company, which is worth $1,24,205 today, indicating a yield of 7.25%.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY |
| Enbridge | $50.51 | 2,459 | $0.915 | $2,250 | Quarterly |
Let’s see if ENB stock is a good buy right now.
Is Enbridge stock a good buy right now?
Enbridge is part of the highly cyclical energy sector. However, the company’s diversified base of cash-generating midstream assets, regulated cash flow, and focus on organic growth have allowed it to raise dividends by 10% annually on average since 1995.
In addition to a steady and rising dividend, Enbridge is armed with an investment-grade balance sheet and a payout ratio of roughly 60%. This provides the company with the flexibility to reinvest in acquisitions and lower debt both of which should translate to higher cash flows.
Enbridge’s growth story is far from over, given the company will complete the acquisition of three natural gas utilities from Dominion Energy for $19 billion by the end of 2024. Once the acquisition is completed, Enbridge’s regulated natural gas business will account for 22% of EBITDA (earnings before interest, tax, depreciation, and amortization), up from 12%.
Analysts remain bullish on ENB stock and expect it to surge 8% in the next 12 months. After accounting for its tasty dividend, cumulative returns would be closer to 15%.
The Foolish takeaway
While Enbridge is a blue-chip dividend stock with a growing payout, investing a huge sum in a single company is quite risky for the average investor. Instead, it’s advisable to hold a basket of quality dividend stocks in your portfolio, which provides diversification and lowers investment risk.
