If you could determine what kind of returns you get from your investments, you could reverse engineer your retirement and lock in a certain amount as passive income. However, things don’t work that way in the real world. Each dividend stock carries business risk. Knowing the risk can help you prepare in advance and mitigate it by diversifying your portfolio with contrarian stocks.
The TSX is home to some of the most lucrative dividend stocks. Some give monthly payouts, some give quarterly, some grow their dividends annually, and some offer a dividend-reinvestment plan (DRIP). A mix of these stocks can help you devise your dividend strategy.
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A top dividend stock for $260/month in passive income
Timbercreek Financial (TSX: TF) is a dividend stock that gives stable monthly payouts and offers a DRIP option. The stock is trading at a 22% discount from its average trading price of $9.5, creating an opportunity for those nearing retirement to lock in a high passive income with its 8.9% yield. If you invest $10,000 right now in the stock, you can get $900 in annual payout or $75 monthly payout.
Now, you may ask how safe this investment is. Timbercreek Financial is a short-term mortgage lender for real estate investment trusts (REITs). It has been paying $0.69 in dividends per share every year since 2017 without increasing the dividend amount. Why so?
Risks associated with 8.9% yield
The lender is a small-cap stock, which has liquidity risk as its trading volume is low. It is gradually increasing its lending portfolio by obtaining capital through securitization. Timbercreek Financial faces credit risk if the REIT it has lent to defaults. However, it has been taking steps to keep this risk to a minimum by only lending it to income-generating REITs. And since the loans are short term, the risk is relatively lower. Moreover, short-term interest rates are higher than long-term loans.
Another risk is lower loan turnover, wherein not many REITs take loans, which reduces its revenue from processing fees. Also, REITs may sometimes prepay their loans to cut interest costs, as they did in the last two quarters when the interest rate was at a decade-high. While Timbercreek enjoyed a 10% interest on its loan portfolio, the turnover shrank, pushing the stock price down.
However, interest rate cuts by the Bank of Canada are reviving loan turnover. Its dividend-payout ratio is 87.8% of its distributable cash flow, giving it the flexibility to continue paying dividends even if income falls slightly.
Buy 4,521 shares of this top-dividend stock
Now that you know the opportunities and risks of Timbercreek Financial, you can invest in this stock to get an additional source of passive income that benefits from both high and low interest rates.
If you have 10 years to retire, you could use Timbercreek Financial’s DRIP and invest $3,000 every year. The DRIP will buy more shares with the dividend amount and buy you 4,521 shares with just a $30,000 investment from your pocket. And you can enjoy a $260 monthly passive income from 2033 onwards.
| Year | Annual Investment | TF Share count $9.5 average stock price | Total TF Shares | Dividend per Share | Total dividend |
| 2024 | $3,000.00 | 386 | 386 | $0.690 | $110.98 |
| 2025 | $3,110.98 | 327 | 713 | $0.690 | $492.30 |
| 2026 | $3,492.30 | 368 | 1081 | $0.690 | $745.95 |
| 2027 | $3,745.95 | 394 | 1475 | $0.690 | $1,018.02 |
| 2028 | $4,018.02 | 423 | 1898 | $0.690 | $1,309.86 |
| 2029 | $4,309.86 | 454 | 2352 | $0.690 | $1,622.89 |
| 2030 | $4,622.89 | 487 | 2839 | $0.690 | $1,958.65 |
| 2031 | $4,958.65 | 522 | 3361 | $0.690 | $2,318.81 |
| 2032 | $5,318.81 | 560 | 3920 | $0.690 | $2,705.12 |
| 2033 | $5,705.12 | 601 | 4521 | $0.690 | $3,119.49 |
If you are due to retire in a year or two, you could invest $35,082 now to buy 4,521 TF shares and start collecting $22 in monthly dividends from September 15 onwards. Each share pays a monthly dividend of $0.0575. This 8.9% yield comes with risk. Hence, it is better to not include this stock in your core portfolio. The passive income from your core portfolio is the one you depend on for daily essentials. Such high-yield stocks are good for income boosters.
