Building an income portfolio is not just about buying high-yield dividend stocks. Depending on when you need the income and how much income you need, you need to diversify your income portfolio. Let’s understand it with a few scenarios.
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Scenario #1: Big income stock for immediate payout
You want to take a break from work and need your money to start generating income immediately. You need a higher income immediately. This financial need calls for a trade-off with income growth, as high-yield dividend stocks may not always generate high dividend growth.
Fiera Capital (TSX: FSZ) is a small-cap stock with a market cap of $670 million. It is in the business of managing assets for individual and institutional clients in return for a management fee. As a small-cap, it is a highly volatile stock with lower trading volume, which means you may have difficulty selling the stock in a bear market.
However, if your end goal is to keep earnings high and not sell the stock, it is a good investment, as the stock can give a 13.9% yield. The stock has been giving dividends for the last 14 years and has the flexibility to continue paying them for a long time. However, it has not grown its dividends since 2019 due to volatility in asset performance. It means your income may not grow with inflation.
While Fiera Capital may be a good investment for the short to medium term, it may not be ideal to substitute long-term needs like retirement income.
Scenario #2: Big income stock for long-term, inflation-adjusted payout
Another scenario could be that you need a long-term income that grows with inflation. In such a scenario, you need a large-cap stock with a diversified revenue stream and a strong dividend history.
Power Corporation of Canada (TSX: POW) is ideal for such a scenario. As a financial holding company, it earns dividends from its two major operating companies: Great-West LifeCo and IGM Financial. It also has holdings in Sagard and Power Sustainable, which invest in real estate and energy infrastructure. These companies have operations in Canada, Europe, the United States, and Asia, giving them global diversification.
With a market cap of $32.4 billion, a 20-year dividend-paying history, and a 14-year dividend-growth history, POW can provide sustainable income for the long term.
Scenario #3: A stock for a higher payout in the distant future
A third scenario is where you are looking to build an income portfolio by investing smaller amounts over the years. At such times, you need a dividend stock with high dividend growth and, if possible, a dividend-reinvestment plan (DRIP).
goeasy (TSX: GSY) is a good stock to build a sizeable passive income in the future. The non-prime lender is still growing its operations by offering new loan products through different distribution channels and in new cities. The company has been growing its loan portfolio gradually while keeping a close check on its credit risk.
The bigger loan portfolio brings in higher interest income, which it passes on to shareholders by growing dividends at an average annual rate of 30%. It has been growing dividends by strong double digits for 15 of these 21 years of dividend-paying history. The six years of no dividend growth were in the 2008 Financial crisis, which saw the biggest banks fail. However, this non-prime lender withstood the worst credit crisis.
goeasy does not offer DRIP, but you can use the dividend income to invest in a DRIP stock like Telus, which also grows dividends but at a 7% average annual rate.
Investor takeaway
The stock market has something for everyone. It is up to you how you choose and diversify your portfolio. Align your financial goal with the stock’s risk-return scenario and find a perfect fit for your needs.
