Category Archives: Dividend Tips

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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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
Image attributed to ccPixs.com

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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Should You Get Big Dividends from Energy Stocks?

Energy stocks can offer big dividends that are too attractive to ignore. However, investors need to look into each stock carefully, as not all energy stocks are made equal. Observing their long-term stock price charts will give a good big picture.

We’ll discuss three high-yield oil and gas producers followed by safer energy stocks for big dividends.

Can You Trust Big Dividends from Oil and Gas Producers?

TORC Oil and Gas (TSX:TOG), Surge Energy (TSX:SGY), and Vermilion Energy (TSX:VET)(NYSE:VET) offer attractive dividend yields of 7-10%. However, their underlying commodities, which experience volatile prices, have a big impact on the companies’ profitability.

oil refinery

The long-term stock price charts of the oil and gas producers illustrate how volatile the stocks can be. Although difficult to time the market, it still makes sense to aim to buy low and sell high, irrespective of what yields they offer.

For example, I once thought getting an above-average yield of 6% from Vermilion was awesome. But Vermilion now yields close to 9.5% — largely due to its stock price decline. So, instead of aiming to get a nice yield on oil and gas producers, I probably would have gotten a better outcome by aiming to buy at a low price; a high yield would just be a nice side effect.

TOG Chart

TOG data by YCharts

SGY Chart

SGY data by YCharts

VET Chart

VET data by YCharts

Generally speaking, oil and gas producers, which have increased their dividends in the last 12 months, offer safer dividends than ones that haven’t.

TORC last increased its monthly dividend by 13.6% in May 2019, Surge last increased its monthly dividend by 5.25% in June 2018, while Vermilion has kept its dividend the same over the last 12 months. Since, TORC most recently raised its dividend, its dividend is likely safer than the rest.

That said, we should also give some credit to Vermilion for having maintained or increased its dividend every year since 2003. It is the only oil and gas producer as far as I know that has achieved that. However, as shown, that doesn’t prevent its stock price from being volatile.

Vermilion’s Dividend Track Record from 2003 to 2018

The investor takeaway is: Aim to buy low and sell high for price appreciation in oil and gas producers and view getting the big dividends in between as a bonus.

For much safer dividends, consider getting big dividends from energy infrastructure companies.

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