Other than being dividend stocks, what do Pepsi (NASDAQ:PEP) and Fortis (TSX:FTS)(NYSE:FTS) have in common?
The dividend stocks have resilient earnings. They are Dividend Aristocrats with a track record of dividend increases. Pepsi and Fortis pay dividends that are sustainable. They offer nice yields of about 3-4%
I use a method that suggests good stock price ranges to buy this type of dividend stocks at. Recently, I have used exactly this method to buy shares of Pepsi and Fortis. I’ll explain the method later in this article. First, let’s go through the above commonalities in more detail.
As you may know, I’ve been investing in stocks for about 13 years. I surely love it when my stocks provide outperforming returns. Of course, there are laggards, too.
What more can stock investing be about if it’s not just about returns? Every stock investor wants to get rich, right?
I discuss below why earnings quality and dividend income could be important to you.
Since I delved into growth investing, including in small caps, I’ve become more deeply appreciative of stocks with underlying businesses that have superb earnings quality.
I hate to break the news. Stocks with high earnings quality won’t give you the greatest returns. However, they give you something else — a defensive, low-risk holding. These kinds of stocks should provide reassurance to any stock investor when the macro environment is in turmoil.
The more conservative you are as a stock investor, the bigger percentage of these types of stocks you should hold in your stock 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
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.