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For a Shot at $5,000/Year in Passive Income, Buy 1,000 Shares of This TSX Stock

Pile of Canadian dollar bills in various denominations
Source: Getty Images

Written by Puja Tayal at The Motley Fool Canada

Many Canadians invest in real estate property, rent out cars and boats, and invest time in writing a book that can earn royalty. All these can help you earn passive income, but it requires significant initial capital, high maintenance costs, and a lot of work. While you build the sources of passive income, you can invest $22,000 now and buy 1,000 shares of this TSX stock for a shot at $5,000 a year in passive income. We are talking about a 23% annual return on investment here.

It is no scheme but an instrument that harnesses the power of compounding and makes money out of money. As it is equity, it does carry business risk. However, the volatility risk is relatively lower than other growth stocks.

Buy 1,000 shares of this TSX stock

The stock is of telecom operator Telus (TSX:T). Note that there are two stocks of Telus trading in the TSX. The other one is Telus International, which trades under the ticker TIXT. It is the technology and IT service arm of Telus and operates as a growth stock that pays no dividends.

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Telus pays quarterly dividends and grows it semi-annually, once in January and second in July. The telco has sustainable cash flows and pays out 65-75% of free cash flow as dividends. However, the high interest rates and accelerated capital spending in 5G infrastructure have reduced its free cash flow and increased the payout ratio to 91%. It did not affect the company’s ability to increase its dividend by 7% this year, as projected by the management.

The tight financing market and regulatory uncertainty have pulled Telus stock down to its pandemic low. Now is a good opportunity to buy 1,000 shares of Telus for $22,000 and lock in a 7% dividend yield. Since half a year has passed, your investment can give you $778 in annual dividends by the end of the year.

How Telus stock can give you a shot at $5,000/year in passive income

How can you convert the 7% dividend yield into a 23% annual return? The answer lies in the dividend-reinvestment plan (DRIP) that automates compounding by reinvesting the quarterly dividend to buy more income-generating shares of Telus.

Since Telus has been growing its dividends semi-annually for 13 consecutive years, this growth accelerates the effect of compounding and allows DRIP to buy more shares.

When forecasting, it is better to take a conservative estimate and keep the calculation simple. Here, I assume a 6% annual dividend growth instead of 3.5% semi-annual growth and compound the dividend annually instead of quarterly for ease of calculation. I also expect Telus stock price to normalize to its average price of $30 in 2026 and grow to $33 by 2030.

  Telus Stock Price

Year

Telus DRIP Shares

Telus Share count

Telus Dividend per share (6% CAGR)

Total dividend

$22.00

2024

0.0

1000.0

0.7782

$778.20

$25.00

2025

31.1

1031.1

$1.6222

$1,672.72

$30.00

2026

55.8

1086.9

$1.7196

$1,868.96

$30.00

2027

62.3

1149.2

$1.8227

$2,094.65

$30.00

2028

69.8

1219.0

$1.9321

$2,355.23

$30.00

2029

78.5

1297.5

$2.0480

$2,657.33

$33.00

2030

80.5

1378.0

$2.1709

$2,991.59

$33.00

2031

90.7

1468.7

$2.3012

$3,379.69

$33.00

2032

102.4

1571.1

$2.4392

$3,832.29

$33.00

2033

116.1

1687.2

$2.5856

$4,362.49

$33.00

2034

132.2

1819.4

$2.7407

$4,986.55

The $778 dividend in 2024 can buy 31 DRIP shares at $25/share. In 2025, you will earn a higher dividend on 1,031 shares, which could come to around $1,672. Your share count will grow annually without you investing a single dime from your pocket. At the end of 2034, your share count could reach 1,819 shares. These shares could give $4,986 in annual dividends.

DRIP saves brokerage costs, and investments through a Registered Retirement Savings Plan saves dividend tax.

Investor note

The above calculation is a rough estimate and will differ from the actual as the actual calculation has several layers. Moreover, any change in dividend growth rate and stock prices could widen the gap between actual and forecast. You can build this table and plug in actual figures every year to keep track of the gap.

The post For a Shot at $5,000/Year in Passive Income, Buy 1,000 Shares of This TSX Stock appeared first on The Motley Fool Canada.

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More reading

Fool contributor Puja Tayal has no position in any of the stocks mentioned. The Motley Fool recommends TELUS and Telus International. The Motley Fool has a disclosure policy.

2024