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Passive income.
It’s one of the most common financial goals for Canadian investors. Everybody likes making money on a stock trade, but what could be better than a stock that pays you income year in and year out? Such are the kinds of stocks that Warren Buffett and other long-term investors made their fortunes on.
This raises a question:
Is it possible to make a truly substantial amount of money – let’s say $1,000 per month – with just dividend stocks? Such a thing would be very helpful if it could be done. Consider that, $1,000 per month is more than what the average Canadian gets from the Canada Pension Plan (CPP). If you take the average CPP payment ($811) and add $1,000 per month in dividend income to it, you get to a sum of money that could potentially pay all of your bills.
In this article, I will explore the topic of making money with dividend stocks. I will show how much money you’d need to invest to get $1,000 a month in dividend income. I will reveal a stock that could pay you that much income with relatively little invested upfront. Finally, I’ll reveal one downside of investing for passive dividend income.
The good news
The good news about investing in dividend stocks is that it can, in fact, pay you some passive income. If you invest $400,000 into a dividend stock with a 3% yield that pays monthly, you’ll get roughly $1,000 per month. If you invest in a high yield stock, you could get to $1,000 per month with much less invested.
Consider First National Financial (TSX:FN). It has a 6.35% dividend yield, and the dividend is paid monthly. So, you only need to invest $189,000 into FN stock to get $1,000 per month in cash flow going.
And what about the company behind FN stock?
First National is a Canadian non-bank mortgage lender. It issues mortgages but, unlike a bank, does not take deposits. Instead, FN funds its mortgages with assets held directly on its own balance sheet. The lender gets people to take out mortgages by partnering with mortgage brokers, who help people shop around for mortgages.
How is this business model working out for First National? Pretty well it seems. FN beat analyst estimates in its most recent quarter, delivering:
- $133 billion in mortgages, up 7%
- $423 million in revenue, up 23%
- $59.7 million in income before fair market value adjustments, up 32%
Overall, it was a pretty good quarter. Net income declined by 27%, but that was only due to the market value of FN’s mortgages declining: operating income grew considerably.
The bad news
The bad news about getting passive income from dividend stocks is that you’ll need to save a lot of money in order to get it. As mentioned in this article, it takes $189,000 to get $1,000 per month even with a high yield stock like FN. If you invest at the market yield (about 3%), it will take you $400,000. It’s a long road to financial independence. But for those who walk it successfully, it’s well worth it.
