Yahoo Finance For a Shot at $10,000 in Annual Passive Income, Buy 2,226 Shares of This TSX Stock
Written by Puja Tayal at The Motley Fool Canada
It is said that as you age, you should reduce your stock market holdings due to the risk they carry. But Warren Buffett still holds a significant amount of equity at age 92. This advice is only for high-risk growth stocks that give you returns on stock price appreciation. Instead of reducing your equity to the bare minimum, you can shift some portion of your retirement portfolio towards Dividend Aristocrats with +50 years of dividend-paying history. They can help you beat inflation while keeping risk under check.
The value of $7,000 today could be $10,000 in nine years
You can calculate the passive income amount you need on retirement and diversify the income streams across fixed income, equity, and investment property. Here, we will take the example of Mary, who wants to earn $7,000 in annual passive income. But any investment needs time to grow and generate returns. Hence, Mary has to factor in inflation.
While Canada has a target inflation rate of 1-3%, it is better to take a higher rate. The value of $7,000 today would be $10,000 in nine years, assuming average annual inflation of 4%.
To beat inflation, you need your investment to grow higher than inflation. Right now, a fixed deposit can give you 4.5% annual interest. But this interest will reduce, as the central bank reduces the interest rate. What won’t reduce is a dividend yield that you have locked in, unless the company slashes dividends.
This TSX stock is your best shot at a $10,000 annual passive income
Enbridge (TSX:ENB) meets all the above requirements. The pipeline stock has been paying a dividend for over 68 years and growing at a compound annual growth rate (CAGR) of 10% in the last 28 years. The company has slowed its dividend CAGR to 3% in the last three years, as it transitions from oil to natural gas. Once its gas pipelines become operational, it might increase its dividend CAGR. Enbridge aims to tap a 30% share of the North American liquefied natural gas (LNG) market.
Enbridge has the financial stability to sustain its dividends, as it strictly maintains its dividend-payout ratio between 60% and 70% of the distributable cash flow (DCF). The DCF is the amount left after setting aside income for future development and maintenance projects and debt repayment. Most companies cut dividends because they increased them aggressively or their payout ratio crossed 90% for a prolonged period.
How to invest in Enbridge stock to generate $10,000 in annual passive income
Enbridge’s shares are cyclical and trade in the $44-$55 range, with a few peaks (above $60) and troughs ($40). You can make opportunistic investments; buy in bulk when the stock falls to $40 in a market downturn, like the 2018 and 2020 downturn. Similarly, you can sell some Enbridge shares if it crosses the $60 mark, because it cannot sustain this price.
But if you want to buy Enbridge shares to generate passive income, buy it in the $50-$55 range, as you can lock in a 6.5% yield.
Year | Annual Investment | ENB Share Count | ENB Dividend Per Share (3% CAGR) | Total Dividend |
2023 | $5,000.00 | 90.91 | $3.55 | $322.73 |
2024 | $5,000.00 | 187.69 | $3.66 | $686.27 |
2025 | $5,000.00 | 387.85 | $3.77 | $1,460.72 |
2026 | $5,000.00 | 802.26 | $3.88 | $3,112.10 |
2027 | $5,000.00 | 1661.10 | $4.00 | $6,637.01 |
2028 |
| 1781.77 | $4.12 | $7,332.75 |
2029 |
| 1915.09 | $4.24 | $8,117.87 |
2030 |
| 2062.69 | $4.37 | $9,005.82 |
2031 |
| 2226.43 | $4.50 | $10,012.35 |
To generate $10,000 in annual passive income, you need to own 2,226 shares of Enbridge. In 2023, the company expects to pay a $3.55 dividend per share. If it continues growing its dividend at 3% CAGR, the dividend per share will increase to $4.5 by 2031. You can use the power of compounding and let your dividends earn you more dividends.
If you buy 2,226 Enbridge shares now, you will need $120,000. Instead, you can set aside $5,000 annually to buy Enbridge shares at or below $55 and add the dividend income to your annual investment. If you repeat this for five years and let your dividends make the remaining investment for another four years, you can own 2,226 shares of Enbridge.
The post For a Shot at $10,000 in Annual Passive Income, Buy 2,226 Shares of This TSX Stock appeared first on The Motley Fool Canada.
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Fool contributor Puja Tayal has no position in any of the stocks mentioned. The Motley Fool recommends Enbridge. The Motley Fool has a disclosure policy.
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