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Often, dividend stocks are associated with energy, banks, and utility companies, because they enjoy regular cash flows from subscriptions, bills, and loan interests. But there are other options. Consider an umbrella company, which owns operating companies that do the business and gives a share of their profit as dividends to the umbrella company. You can invest in several companies and enjoy dividends by owning shares of such umbrella companies.
Here is a financial services stock that can diversify your dividend portfolio and lock in $658 per month in passive income.
This top dividend stock to buy for passive income
Power Corporation of Canada (TSX:POW) is a financial services holding company. Its 57.5% portfolio is in Great-West Lifeco, whose wholly-owned subsidiaries are Canada Life, Irish Life, and Empower. POW’s next big stake is in IGM Financial, a wealth management company. It also owns private equity and real estate firm.
POW’s life and wealth business has exposure to Canada, the United States, and Europe. The current market environment of high interest rates has affected the demand for life insurance and real estate. However, a bullish stock market has strengthened returns in wealth management. POW’s diversified asset portfolio across contrarian businesses helps it preserve its dividends and grow them at regular intervals.
POW has been paying a regular quarterly dividend for 19 years. It has grown its dividend in 12 out of 19 years. There was a six-year phase (2009-2014) when the company did not grow the dividend, as the 2008 subprime crisis collapsed America’s financial system. Everyone from banks to mortgage companies to insurers took a hit from mass delinquency of mortgages and credit cards. While big banks collapsed, POW sustained the worst crisis the financial sector had ever seen.
POW resumed dividend growth in 2015 and has been increasing it at a compound annual growth rate (CAGR) of 7%.
How to earn $658/month in passive income from this one stock
For 2023, POW is likely to pay $2.1 in annual dividends. To get $658/month in passive income, you will have to buy 3,763 shares of POW, which will cost you $141,865 at $37.7/share. But you can earn $658 in monthly passive income by investing $4,000 annually for the next 12 years, investing $48,000 in your Tax-Free Savings Account (TFSA).
Here is a rough estimate of how your investments can grow in POW. The estimate assumes POW increases its dividend at a 5% CAGR in the coming 12 years. It also assumes your average cost per share is $35. I arrived at this average as POW’s last 10-year stock price hovered in the $33-$35 range, with a few outliers.
| Year | Annual Investment | POW Share count $35 average stock price | Total POW Shares | Dividend per Share (5% CAGR) | Total dividend |
| Mar-24 | $4,000.00 | 114.00 | 114.00 | $2.1000 | $239.40 |
| Mar-25 | $4,239.40 | 121.00 | 235.00 | $2.21 | $518.18 |
| Mar-26 | $4,518.18 | 129.00 | 364.00 | $2.32 | $842.75 |
| Mar-27 | $4,842.75 | 138.00 | 502.00 | $2.43 | $1,220.37 |
| Mar-28 | $5,220.37 | 149.00 | 651.00 | $2.55 | $1,661.72 |
| Mar-29 | $5,661.72 | 161.00 | 812.00 | $2.68 | $2,176.32 |
| Mar-30 | $6,176.32 | 176.00 | 988.00 | $2.81 | $2,780.43 |
| Mar-31 | $6,780.43 | 194.00 | 1182.00 | $2.95 | $3,492.70 |
| Mar-32 | $7,492.70 | 214.00 | 1396.00 | $3.10 | $4,331.31 |
| Mar-33 | $8,331.31 | 238.00 | 1634.00 | $3.26 | $5,323.23 |
| Mar-34 | $9,323.23 | 266.00 | 1900.00 | $3.42 | $6,499.29 |
| Mar-35 | $10,499.29 | 300.00 | 2200.00 | $3.59 | $7,901.77 |
For $4,000, you can buy 114 shares of POW at $35/share and earn $239.4 in annual dividends by March 2024. Next year, you invest another $4,000 and reinvest the dividend income to buy more shares (235). As POW increases its dividend, your dividend income grows along with your share count, compounding your returns. At the end of March 2035, you could own 2,200 shares of POW that pay $7,901.7 in annual dividends ($658/month in passive income).
Risks associated with POW
There are concerns about rising mortgage delinquencies and a possible recession in America. If a recession materializes, POW might pause dividend growth. But its stock price will likely fall, making up for the lack of growth.
Keeping everything else the same, if POW pauses the dividend per share at $2.1 till 2029 and then resumes 5% dividend growth, your passive income could be around $470/month by March 2035. You can create such scenarios through this table and calculate a passive-income estimate.
