Do you want to get a substantial passive-income stream going with dividend stocks?
There are many ways to make that happen.
The easiest is buying exchange-traded funds (ETFs). Such funds are highly diversified, making them relatively low risk compared to individual stocks. With the TSX Index yielding about 2.5% today, you can get about $1,250 per year in dividends after investing $50,000.
Now, a $1,250 annual income supplement is not nothing, but let’s be realistic: it’s not a whole lot, either. Realistically, you’re going to want more than that if you plan to live off of dividends. It’s here that reasonably diversified portfolios of high-yield stocks can make sense. In this article, I will explore one stock that can produce $2,950 per year worth of dividend income with as little as $50,000 invested.
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First National
First National Financial (TSX: FN) is a Canadian non-bank lender with a 5.9% dividend yield. If you invest $50,000 at a 5.9% yield, you get $2,950 back per year in dividends, assuming the dividend doesn’t change. So, FN stock has an above-average amount of income potential.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY |
| First National | $41.52 | 1,204 | $0.204167 per month ($2.45 per year) | $2,950 per year | Monthly |
As you can see in the table above, First National Financial stock produces a higher amount of dividend income than a typical TSX index fund does. That’s pretty good. And better yet, the company has the prospect of being able to increase its dividend going forward. First National is a mortgage lender that partners with brokers to sell mortgages to Canadians who usually get denied financing, such as self-employed people. Banks usually won’t touch these categories of people, which means that FN has a lucrative niche where it doesn’t face much competition. Also, the company sells most of its mortgages to third-party investors, limiting its risk.
A high yield
The reason why FN stock has such a high yield is because the company passes a lot of profit on to shareholders and is fairly cheap. At today’s price, First National trades at 11.5 times earnings and 3.7 times operating cash flow. That is fairly cheap in a world where the S&P 500 is pushing 30 times earnings. That’s not because FN doesn’t grow, either: the company has increased its revenues and earnings substantially over the last five and 10 years.
A sensible payout ratio
Despite its high yield, FN stock actually has a pretty modest payout ratio of 68%. That compares to payout ratios well above 100% for pipelines and other high-yield sectors. So, First National retains some ability to invest its profits back into itself.
Revenues trending downward
One word of caution is in order here: First National’s revenues have been trending downward lately. Although the company’s earnings per share were up 7% in the trailing 12-month period, revenues were down 13%. It appears that the Bank of Canada’s interest rate cuts are negatively impacting FN’s top line. So, investors will want to monitor FN’s dividend sustainability going forward.
