When buying dividend stocks to meet a specific passive-income goal, you have two main variables to consider: capital and yield. If you have adequate capital, you may choose low-yield, high-growth stocks and still meet your passive income requirement. However, if you are working with a limited amount of capital, you may have to opt for high-yield stocks to make up the difference.
A capital market company
A market crash and recession impact more than just publicly traded companies. They impact the general population and a wide range of privately owned businesses — big and small. Many of these businesses get so financially distressed that they are left with a few options: costly debt or capital injection instead of control. Companies like Alaris Equity Partners (TSX:AD.UN) can be lifesavers for many such businesses.
Alaris has a simple business model. It invests in mature businesses with a decent cash flow history and allows the current owners to maintain their control over the business. This allows it to ask for a more generous financial stake than typical businesses that take over control of the business with their capital injection.
This business model was the engine behind Alaris Equity’s powerful bullish phase that came right after the Great Recession. The company rose by about 670% in fewer than five years. It’s currently about half that size, but similar market conditions are brewing, and we may see the stock rise again.
Till then, the most attractive feature of this company is its generous dividend yield of about 7.85%, backed by a healthy payout ratio of 47%. At this rate, you will need to invest about $77,000 to generate a $500-a-month passive income. Since the company is raising its quarterly payouts, you may expect your passive income to rise year over year.
An investment management firm
Even though Fiera Capital (TSX:FSZ) also invests in other businesses, its strategy aligns more with a typical asset management firm than Alaris. The Montreal-based company has been in business since 2003 and has grown its assets under management to about $158.5 billion. The bulk of its capital is tied to public markets — both fixed-income assets and equities.
The bulk of its revenues come from its assets in Canada, but it also has a decent presence in the U.S. and Europe. The stock is currently trading at a hefty discount from its pre-pandemic peak (about 40%), and the best consequence of this discount is the mouthwatering yield of 11.2%. With this yield, you will only need about $54,000 to generate a monthly passive income of $500.
Note that Fiera stock has been going down at a steady pace for a while now, and even though the revenues are holding steady, some trouble signs are there.
Foolish takeaway
The two small-cap stocks are offering relatively massive yields. If you buy both stocks to generate a $500 monthly passive income, you will need a capital of about $64,000. Both companies have a history of raising payouts, so given enough time, and assuming a decent rise in the payouts, you may receive a monthly income in surplus to the $500 you get from investing in the two stocks.
