In July, the Financial Post highlighted that Canada’s household savings rate had soared to 6.9% in the first quarter, a figure not seen since 1996, excluding the pandemic anomaly. This savings rate reflects the portion of disposable income Canadians manage to set aside.
Statistics Canada reported that the median household income after taxes in 2022 was approximately $70,500. Assuming a 3% growth rate, this translates to a projected median income of about $74,793 for the current year. A savings rate of 6.9% equates to roughly $430 per month (or an annual savings of $5,161).
While these figures offer a broad perspective, they may not apply to every household. For those who can only manage to save $250 a month, the question arises: How can these regular savings be transformed into significant annual dividend income? The good news is that, with consistent savings and smart investing helped by compounding, your dividend income has the potential to grow substantially over time.
How dividend income grows
The growth of dividend income can be attributed to two main factors. First, investing more money in dividend-paying stocks increases the total dividend income. Second, the dividends paid by the stocks you hold can increase over time. To discover high-quality dividend stocks, you might consider exploring Canadian Dividend Aristocrats, known for their reliable dividend payments.
For example, iShares S&P/TSX Canadian Dividend Aristocrats Index ETF currently offers a distribution yield of about 4%. Investing $250 monthly (for a total investment of $3,000) over the first year would result in approximately $120 in dividend income in the first full year.
Building a high-yield dividend portfolio
In today’s market, investors seeking higher income could target a portfolio yield of around 6% when constructing a diversified dividend portfolio. However, it’s important to be cautious: stocks with exceptionally high yields often exhibit slow or stagnant dividend growth. Moreover, extremely high yields can be a red flag for potential dividend cuts.
One notable example of a safe, high-yield stock is Enbridge (TSX:ENB), a top holding of the Canadian Dividend Aristocrats exchange-traded fund (ETF). Enbridge offers a robust and safe yield of 6.7%. The stock is reasonably valued and expected to grow its dividend by approximately 3% annually in the near term. As interest rates decrease, income-focused investors may increasingly turn to high-yield stocks like Enbridge, potentially driving their prices higher.
Projecting dividend income growth
To illustrate the potential of investing $250 monthly, let’s consider a simplified scenario with a 6% yield. Assuming consistent investment and no dividend growth, the annual dividend income would start at $180 from a $3,000 investment in the first year.
Over time, this income can multiply significantly. For instance, after 10 years, the dividend income could be 10 times the initial amount, reaching $1,800 annually. After 20 years, it could grow to 20 times the original figure, totalling $3,600 annually. This scenario is based purely on consistent saving and investing in safe 6% yields. With dividend growth, the annual dividend income would be even higher over time.
| Year | Cumulative Savings/Contributions | Annual Dividend |
| 1 | $3,000.00 | $180 |
| 2 | $6,000.00 | $360 |
| 3 | $9,000.00 | $540 |
| 4 | $12,000.00 | $720 |
| 5 | $15,000.00 | $900 |
| 6 | $18,000.00 | $1,080 |
| 7 | $21,000.00 | $1,260 |
| 8 | $24,000.00 | $1,440 |
| 9 | $27,000.00 | $1,620 |
| 10 | $30,000.00 | $1,800 |
| 11 | $33,000.00 | $1,980 |
| 12 | $36,000.00 | $2,160 |
| 13 | $39,000.00 | $2,340 |
| 14 | $42,000.00 | $2,520 |
| 15 | $45,000.00 | $2,700 |
| 16 | $48,000.00 | $2,880 |
| 17 | $51,000.00 | $3,060 |
| 18 | $54,000.00 | $3,240 |
| 19 | $57,000.00 | $3,420 |
| 20 | $60,000.00 | $3,600 |
The Foolish investor takeaway
By making regular contributions and investing wisely, your dividend income can grow substantially, providing a steady and increasing stream of passive income. This approach leverages the power of compounding and consistent investing to turn modest savings into a substantial income source over the long term.
