Category Archives: Dividend Ideas

How to Create a Passive Income Portfolio

To create a passive income portfolio, you can invest in bonds or stocks that generate interest or dividend income without you having to lift a finger. I prefer to invest in stocks which have outperformed bonds in the long run.

I also like the concept of investing in stocks because I’m owning stakes in businesses and benefiting from their profits (although I also take on their risks). This is markedly different from purchasing bonds for which you’re lending your money to governments or corporations for interests in return.

In fact, dividend investing is my favorite way to generate passive income. There are so many safe dividend stocks to choose from. Even in a booming stock market like today, you can still find quality businesses at good valuations.

Here’s how to create a passive dividend income portfolio:

  • Buy stocks that offer safe dividends at good valuations
  • Diversify but don’t di-worsify
  • Aim for a low-maintenance portfolio that’s replicable, scalable, and can be largely automated
grow a money tree

Buy stocks that offer safe dividends

The U.S. and Canadian stock markets offer yields of 1.8% and 2.8%, respectively. There are plenty of safe dividend stocks that offer higher yields of about 3-6%.

However, typically, the higher the yield of a stock, the slower its dividend growth will be. (Sometimes, high yielders don’t increase their dividends.) Similarly, low yield stocks tend to increase their dividends faster. Typically, dividend growth stocks are safer and better than stocks that simply maintain their dividends.

Buy stocks at good valuations to protect your invested capital and maximize your gains.

Here are a few examples.

A high yield example

NorthWest Healthcare Properties REIT (TSX:NWH.UN) owns a high quality portfolio of medical office buildings and hospital properties in major markets in Canada, Brazil, Germany, The Netherlands, Australia, and New Zealand.

The healthcare REIT generates stable cash flows from having a high occupancy of about 96% and a weighted average lease expiry of 13 years. Additionally, it gets organic growth from having more than 70% of its net operating income indexed to inflation. It also has CAD$370 million projects in its development pipeline that’ll also add to growth.

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Which Stock is More Likely to Cut its Dividend?

Vermilion Energy (TSX:VET)(NYSE:VET) and TORC Oil & Gas (TSX:TOG) are trading at multi-year lows and offer yields of 10% and 7.6%, respectively. Which is more likely to cut its dividend?

There are some things that management can’t control, such as commodity prices, and there are some things that they can control, such as capital allocation (i.e., how much cash flow to allocate for reducing debt, sustaining the business, investing in growth projects, and paying dividends).

Looking at how the companies have handled their capital allocation in the past can give an idea of which oil & gas producer will more likely cut its dividend.

Vermilion

Vermilion’s stock has maintained or increased its cash distribution or dividend every year since 2003. Since 2003, VET’s total payout ratio (which accounts for sustaining capital, growth capital, and dividend) has expanded to as high as 162%, but the company didn’t once cut the dividend.

VET places a high priority on its dividend. If history is indicative of the future, then VET will try to maintain the dividend even when the operating environment is tough.

Notably, VET doesn’t have the tendency to buy back stock like other energy companies, such as Suncor Energy (TSX:SU)(NYSE:SU) and Canadian Natural Resources (TSX:CNQ)(NYSE:CNQ). Last year, the capital the company returned to shareholders was 100% dividends.

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What does it take to be a Good Investor?

In contrary to popular belief, you don’t need to be a great investor to do well in investing, which is to set an attainable income or returns goal and be able to achieve it over the long run.

For example, it’s very reasonable to expect total returns of at least 10% from stock investing.

Some investors require a concrete monetary goal to work towards. For example, you may aim to generate $50,000 of dividends a year or work towards a $1,000,000 portfolio. If that’s the case, break it down — initially, aim for $1,200 of dividends a year or a $10,000 portfolio, respectively. It all starts with saving and investing regularly.

Here’s what it takes to be a good investor:

  • Stick with what you know
  • Be patient
  • Build your risk tolerance

Sounds simple enough, right?

saving, investing, and compounding
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Stick with what you know

When investing in a stock, you’ve become a part-owner in a business. So, especially for new investors, I highly recommend sticking with profitable businesses that generate stable earnings or cash flow growth over time. These tend to be stocks that pay a growing cash dividend over time to its shareholders.

Some big bank stocks in Canada have become quite attractive lately, including Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) or Scotiabank. Banks are traditional businesses. In fact, Scotiabank has been around since 1833!

You know what banks do — at a basic level, they accept deposits, offer interests on those deposits, and lends out those deposits (up to a certain level) for higher interests to make a profit. Later on, they also helped their customers invest their money. They also make money from their investment platforms when retail investors (like you and me) make trades on their own.

If you know what you own, you’re more likely to hold on to your shares through thick and thin. Of course, it helps that Scotiabank pays a regular dividend. In fact, the dividends of the Big 5 Canadian banks, Scotiabank included, are known to be some of the safest in the world. They maintained their dividends even through the last financial crisis.

They all have payout ratios of about 50%, which leaves a big buffer to keep their dividends secure in bad economic times when earnings are reduced (temporarily).

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