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.
The Canadian Dividend Aristocrat list is a good place to explore prospective dividend stocks for buying. There are dividend stocks that grow their dividends at an incredible pace. Ideally, we aim to focus on dividend stocks with long-term growth trends.
Typically, the longer the dividend growth streak of a dividend stock, the better. But you’ve got to investigate its business and determine if more above-average growth is coming. And make sure you pay a reasonable multiple for the stock.
You can observe the one- and three-year dividend growth rates (DGR) to get an idea of recent dividend increases. Also, look at the five- and 10-year DGR. The 10-year rate will likely include a recession, which provides a glimpse of how resilient the business might be during tough economic times. Dig into the year(s) of recession for the real resilience of the business.
Here are some of the top Canadian Dividend Aristocrats with incredible five-year DGR. Stocks with high dividend growth tend to have small yields. (Typically, you would find blue-chip Canadian dividend-growth stocks growing dividends in the 5-7%. It would be amazing to find one growing its dividend at 10%.)
We believe by going through many examples, investors can better identify the type of dividend stocks to invest in for long-term buy and hold or potentially sizing a position accordingly for trading. Here are five dividend stock examples.
Railroad stocks have been really resilient in this economic downturn. Some are even making all-time highs! However, they are all expected to experience earnings cuts this year on a GAAP basis, which is not surprising given the far and wide impact the COVID-19 pandemic is having on the global economy.
Railroad stock data by YCharts. The 1-year price action of railroad stocks: CN Rail, CP, UNP, NSC, and CSX.
In other words, these railroad stocks are getting expensive. Some are fully valued. Others are slightly overvalued.