People save money to spend on something or have a safety net in case of a financial emergency. But for those contemplating on the future, saving money is essential to building wealth and enjoying a high quality of life in retirement. However, socking away a specific amount every month isn’t enough if the money will just sit around.
Inflation eats away the value of idle money over time. However, money can be made through dividend investing. Many retirees have invested their savings in dividend stocks because dividend income is a replacement for their paycheques in the working years.
Dividend investing and reinvesting
Dividend investing provides regular income streams as if you’re on auto-pilot. The cash comes regularly depending on the stock’s payout frequency. Most TSX dividend payers pay quarterly dividends, some annually and others monthly. Once you’ve identified a company and buy shares, the next step is to reinvest the dividends.
The power of compound interest is at play with dividend reinvestment. Instead of collecting dividends, investors use them to buy more shares. Some companies offer a dividend reinvestment plan (DRIP) for shareholder convenience. The invested capital grows faster as you accumulate more shares through this simple process.
Savings and investment plan
Saving $250 monthly for 120 months or 10 years will total $30,000. This is good but not necessarily ideal because the real value might be lower due to inflation. A $30,000 investment in Whitecap Resources (TSX:WCP) will produce $2,010 in annual dividend income.
The energy stock trades at $9.58 per share (+9.46% year to date) and pays a lucrative 6.7% dividend. Since the payout frequency is monthly, the investment transforms into $167.50 monthly. Moreover, the capital is untouched or intact at $30,000.
Let’s assume Whitecap’s dividend yield remains constant, and you save $250 every month to buy WCP shares. If you stop after 10 years, your money will compound to $36,500, more or less, including dividend reinvestment. By then, you’d generate approximately $2,445 annually in dividend income or $203.79 monthly.
The advantage of monthly dividend payments is that you can reinvest the dividends 12 times a year, unlike if the payout frequency is quarterly. Whitecap Resources is one of the few monthly income stocks on the TSX.
Investment takeaway
Whitecap Resources operates petroleum and natural gas properties in West Central Alberta, British Columbia, Southeast Saskatchewan, West Central Saskatchewan, and Southwest Saskatchewan. This $5.7 billion oil-weighted company generates cash flows and sustains dividend payments because of a solid foundation – the light oil resource base.
In 2023, total revenue (petroleum and natural gas) and net income declined 20.2% and 47% respectively to $3.6 billion and $889 million compared to 2022. Still, management said it was a strong year, operationally and financially. Besides the 11% production per share growth and higher reserve values, net debt fell 27.6% year over year from $1.9 billion to $1.4 billion.
Because of the net debt milestone, the Board approved a 26% increase in WCP’s dividend base. The company will continue to earmark a portion of free funds flow to debt reduction to strengthen the balance sheet further. It should also provide downside protection and enhance future opportunities.
Larger position, higher dividend income
Dividend investing and reinvesting go hand in hand. A larger position means higher dividend income after completing your savings and investment plan.
