Dividend investing can be a perfect way to earn passive income. I started this blog years ago, intending to earn passive income from dividend stocks. That’s why I chose the domain name passive-income-earner.com. However, I wasn’t investing for passive income initially.
I failed to set the criteria for passive income investing — something like the following. First, the dividend stock should provide a sufficient yield. Second, the business cannot be so volatile that there’s a chance of a dividend cut. Third, the stock should allow you to sleep well at night.
Does the dividend stock have a big enough yield?
Some dividend stocks, even though, they’re backed by quality businesses, are not good for passive income. For example, Canadian Pacific Railway (TSX:CP)(NYSE:CP) yields only 0.8%. The best five-year GIC rate is going for 2.3%. So, I would require a dividend stock with a yield of at least 3% for passive income.
We would love to invest in winners only. But that’s not how real-life investing is like. Sooner or later, it’s inevitable to run into a laggard in your dividend stock portfolio.
Sometimes, laggards provide underperformance but still a positive return. Other times, laggards outright decline over multiple years, standing out like a sore thumb in an otherwise well-performing diversified dividend portfolio.
Here are several ways to deal with laggards. Below, I’ll revisit some of my mistakes as examples to learn from.
Enbridge is a great income stock. If you’re looking to stash away some cash for at least five years, consider picking up some shares for a juicy yield of about 6.3%. This is way better than the interest income provided by GICs or CDs.
A dividend growth streak of 24 years with a three-year dividend growth rate of 11.7% puts Enbridge at the top of the list for safe dividends. Although the leading North American energy infrastructure company will experience slower growth compared to the last 20 years, it will still make a decent investment with its big yield and stable growth profile.
Enbridge anticipates growing its distributable cash flow by 5-7% over the next few years. So, it’s logical to anticipate dividend growth of about 5% per year in the foreseeable future.
The difference from Enbridge common stock and GICs or CDs, of course, is that Enbridge comes with greater volatility. That’s why investors must have a long-term investment horizon if they’re considering Enbridge. The yield on cost can grow to 8% in five years assuming a 5% dividend growth rate!