Earning an extra $5,000 of cash every year could go a long way. Consider that $5,000 spread across 12 months would average an extra $416 a month of passive income. With inflation continuing to soar, any extra income a month helps.
However, to earn that income, you will have to give up some cash to invest. So how much cash would you need to earn $5,000 a year? Unfortunately, there is no straight answer.
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How much cash do you need to make a safe $5,000/annum?
It really depends on the yield you hope to earn. The higher the average portfolio dividend yield you earn, the lower the amount of cash you will have to put up. While it might be tempting to pack your portfolio with very high yielding dividend stocks, investors do need to be cautious.
Stocks with dividend yields over 7% tend to indicate a stock with serious risks. Either its business is in decline, facing serious headwinds, and/or its balance sheet is in peril. There tends to be a reason its yield is so elevated.
Be careful with overly large dividend yields
Periodically, this is not the case; the market has it wrong, and you can pick up a great bargain. However, often, big dividend yields should be avoided. What is the point of collecting a big dividend if it gets cut, or your stock substantially loses value over your hold period?
Most good quality dividend stocks yield in a range between 2% and 6%. If you divide the desired annual income by the required yield, you get the required amount of investment.
With a 2% average yield, you would need to invest $250,000 of cash to earn $5,000 per year. With a 6% yield, you would need to invest $83,333 to earn the same.
If you want some quality stocks that pay a nice dividend but also could provide capital growth, here are two to consider.
An energy stock with an attractive dividend yield
For a higher yielding stock, Topaz Energy (TSX:TPZ) looks attractive today. It yields 5.72%. Topaz has also steadily been increasing its dividend. Its quarterly dividend is up 60% since 2020.
Topaz operates a mix of energy infrastructure and energy royalty streaming assets. Its infrastructure assets provide steady, long-term contracted streams of cash flows. Its royalty assets earn a contracted proportion of energy production on the land it has rights to.
The royalty and energy infrastructure company has focused on very strong regions in Western Canada. As development activity increases, it gets natural organic income growth.
The company has very low operating costs, so it can afford to distribute most of its excess cash right back to shareholders. Its solid balance sheet should afford acquisition growth in the future as well.
A Canadian tech stock with a big cash balance
If you are looking for a good dividend and some potential growth, Enghouse Systems (TSX:ENGH) is intriguing at this point. This stock yields 3.5% today. It has compounded its annual dividend by a 17.8% rate over the past 10 years.
Enghouse operates a mix of communication and asset management technology businesses. The company has not performed well because the communication sector has seen declining demand and rising competition since 2021.
This company generates between $18 million and $30 million of excess cash every quarter. It has $250 million of cash on its balance sheet. It has been deploying that into tuck-in acquisitions, but it could make a substantial purchase in the coming quarters.
Once the software and services firm starts delivering growth again, this stock could enjoy a material valuation recovery. In the meantime, shareholders get a nice growing dividend stream.
