You don’t need to buy real estate or own a small business to earn passive income. Stocks can be a powerful source of passive income without the troubles of managing/operating a property or business.
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Stocks are a great place to earn passive income
Certainly, as with any investment, you need to complete your due diligence. Look for dividend stocks that have a long record of paying their dividend.
Look for stocks that have good assets/services, smart managers, and strong balance sheets. If you pick wisely, you might even see your passive-income stream grow as those stocks increase their dividend rate.
If you want to turn your savings into passive income, here are two Canadian stocks to consider adding to today.
A top Canadian stock for a growing passive-income stream
Canadian Natural Resources (TSX: CNQ) is one of Canada’s greatest dividend-growth stocks. This may be a bit of a shock because it is an oil and gas stock — typically a volatile sector. However, Canadian Natural has become a powerhouse.
This passive-income stock is Canada’s largest energy producer. It has used its scale and operating expertise to create energy production operations that are lean, efficient, and highly profitable. The company has decades’ worth of reserves. This means it can maintain or even grow production for years with very little additional cost.
The company generates a lot of excess cash. This has allowed it to be opportunistic with acquisitions. At the same time, it has been delivering very strong returns to shareholders in the form of dividends and share buybacks.
It has increased its dividend for 25 consecutive years. What is even more impressive is that its annual dividend has risen by a 21% compounded annual growth rate.
After a recent pullback in the share price, Canadian Natural stock yields 4.85%. For one of the best-run companies in Canada, it trades at an attractive valuation. If you hold this passive-income stock for the long run, your yield on cost will likely be much larger if it continues its dividend-growth trajectory.
A software stock kicking out tonnes of cash
Enghouse Systems (TSX: ENGH) is another interesting stock if you want passive income from a non-traditional source. Enghouse is a Canadian technology company with a focus on communication and asset management software.
Generally, Enghouse does not provide flashy, exciting software. It is used for call centres, emergency systems, transport fare management, and communications. Enghouse generates a substantial amount of cash from its businesses.
The company is well-known for being a serial software acquirer. However, in recent years, its acquisition pipeline has stagnated. That, alongside a weaker communications market, has put pressure on the stock. Today, it trades at one of its cheapest valuations in several years.
Given its strong cash generation, Enghouse has grown its annual dividend by a very strong 18% compounded annual rate. It is sitting on a pile of excess cash (over $270 million). That will likely go to further increase the dividend in 2025. It may also result in a special dividend or share buybacks.
However, many suspect Enghouse’s management is being patient in making a big acquisition. Investors have been waiting a while for this. If it does happen, there could be a nice re-rating in the stock. If that doesn’t occur, we may see that cash mountain convert to more passive income for shareholders.
