Dividend stocks are a great way to earn passive income from the stock market. Unlike other passive-income alternatives (like real estate, a small business, or a side hustle), investing in dividend stocks requires no physical labour and no management.
Investing in stocks for income can be passive
Of course, you need to do your research, and you need to monitor the businesses of the dividend stocks you invest in. Also, you are wise to diversify your portfolio across sectors and industries. This way, you can help offset the risks of being overly concentrated on one industry or sector.
Most people are looking for dividend income to supplement their employment income. So, $1,500 averaged per month (or $18,000 per year) is a reasonable amount to wish for.
The Index works, but it is not ideal
If you invested in the TSX Index through a simple exchange-traded fund (ETF) (like iShares Core S&P/TSX Capped Composite Index ETF), you could earn a 2.67% dividend yield. If you divide your required income ($18,000 per year) by the yield (2.67%), you will find that you need $674,157 invested in the Index to earn $1,500 per month.
While the Index is likely the easiest solution, you don’t get to choose the holdings inside. Canada is overweighted in banks and energy companies. So, when owning this particular Index, you are perhaps not as diversified as it seems.
A better risk/reward scenario by building your own portfolio
By picking individual dividend stocks, you can increase your portfolio yield substantially over the index. An average portfolio yield of 4.5% can provide you with a good mix of quality companies, stable (and even growing) dividend income, and lower risk/higher reward over the Index.
With an average weighted yield of 4.5%, you would only need to invest $400,000 to collect an average of $1,500 per month. If you are looking for stocks that could hit that yield threshold, here are a couple to consider today.
An energy stock with an incredible dividend record
Despite operating in the more cyclical energy sector, Canadian Natural Resources (TSX:CNQ) has been one of Canada’s best dividend-growth stocks. Its dividend has consecutively increased by a 21% compounded annual rate for 24 years!
The great thing is that today, you can buy it with a 4.6% yield. While oil prices have recently slipped, Canadian Natural has low, sustainable levels of debt.
This year, it committed 100% of its cash flow after operating costs to shareholders. With an industry-low cost of production, it should be able to continue pumping out cash to shareholders for many years to come.
A real estate stock with a 4.5% dividend yield
Another solid dividend stock is Granite Real Estate Investment Trust (TSX:GRT.UN). It owns and manages logistics and manufacturing properties across North America and Europe.
While the industrial real estate market has recently slowed, Granite has many credit-worthy tenants, long-term leases, a low-leveraged balance sheet, and a sensible management team. It also has a sustainable distribution with a sub-65% payout ratio.
With interest rates coming down, investors are moving out of Guaranteed Investment Certificates and back into steady income stocks. That should be favourable for real estate stocks like Granite.
Granite stock has a 4.5% dividend yield today. It has increased its dividend for 13 consecutive years. With mark-to-market rents going for 15-25% higher than its current rental rates, Granite still has strong mid-to-high single-digit organic growth potential in the years ahead.
