Invest $7,000 In This Dividend Stock For $672 In Passive Income

Invest $7,000 in This Dividend Stock for $672 in Passive Income

High yield can be an essential requirement when you need to start even a modestly sized passive income with a small amount of capital.

Adam Othman

Adam is a value investor who is always on the hunt for fantastic undervalued companies that he can share with Motley Fool readers. He follows Warren Buffett and Charlie Munger's investment advice and has completed the Canadian Securities Course. When he's not investing, Adam can usually be found traveling or skiing.

Published November 13, 2024 8:30 pm EST

Buying a dividend stock to create a passive income stream seems easy enough. The dividend yield is typically the most crucial variable for most investors, especially if they work with limited capital. A high yield can help them get the most out of their investment. Consistency of the dividends and reliability are next in line, and for many investors, these are the primary concerns.

However, if you are comfortable with some inconsistency, Labrador Iron Ore Royalty (TSX: LIF) is a promising dividend stock.

Super sized rock trucks take a load of platinum rich rock into the crusher. — Source: Getty Images

The company

Labrador Iron Ore Royalty owns about 15% of the Iron Ore Company of Canada (IOC). The majority owners are Rio Tinto and Mitsubishi. IOC is a premium-quality iron ore producer, and investing in Labrador Iron Ore Royalty is one way for Canadian investors to get a slice of this company.

This is a significant strength because the quality of the iron ore pallets that the underlying company produces and stability it enjoys thanks to other shareholder corporations allows Labrador Iron to remain a decent investment, even when iron ore prices fluctuate drastically.

In the last five years, iron ore prices have reached highs of US$200 and lows near US$80. However, the stock’s drop is not nearly as drastic. That’s different from the relationship other mining stocks have with the price of the underlying metal.

The dividends

The most compelling reason to buy Labrador Iron Ore Royalty stock is its dividend yield, which is currently around 9.6%. If you are investing $7,000 in the company, you can generate an annual income of about $672 and a monthly income of about $56. That looks more than decent, but it’s essential to understand the inconsistent nature of the dividends.

In the last five years, the annual dividend payouts have swinged from $6 per share per annum (2021 – highest) to $2.25 per share per annum (2023 – lowest). That’s well over 2 times the difference. The gap is not as wild when it comes to yields but it’s still significant.

As for the quarterly dividends, the highest number so far was $2.10 per share per quarter and the lowest was $0.25. The company also has a history of paying special dividends.

Foolish takeaway

The stock is currently in a bear market phase and trading at a 41% discount from its five-year peak. The valuation is relatively stable right now, but apart from a few bull market phases and spikes in the past, dividends have been the chief attraction of this stock.