It is said that you invest only that amount in the stock market what you are willing to lose. The saying is true as the market fluctuates, and if you need emergency money, you might be forced to sell stocks at a loss. After all, stocks are about investing in a business, and a business has its ups and downs. However, some businesses have established themselves to earn stable cash flow. These are dividend stocks; they are less volatile, and they give you a steady payout.
This dividend stock has an 8.5% yield
Among the businesses that generate steady cash flows are rental and lending businesses. Here, you earn a monthly rent or interest, and the risk is a lack of turnover, which means your property or loan money stays idle for a long time. These businesses take time to establish a client base and build a portfolio. But once they build the foundation, business compounds.
One business that enjoys the benefit of both rent and interest is short-term mortgage lender Timbercreek Financial (TSX:TF). It lends money to real estate investment trusts (REITs) on properties that generate rental income. It gives them short-term loans at a higher interest rate and earns from loan processing fees and interest.
The lender benefitted from interest rate hikes as its loan portfolio yield touched 10%. However, high interest reduced the loan turnover as REITs paused their developing activity and repaid high-interest, short-term loans to reduce their interest expense. Timbercreek saw more REITs repaying loans than taking loans in 2023. However, new loans picked up in 2024, and the rate cuts will further increase loan turnover.
Hence, if you look at the lender’s stock price, it picked up in June as the Bank of Canada began rate cuts. However, it is still down 16% from its March 2022 levels when loan turnover was high. The lender maintained its dividend per share even when the stock price fell. Hence, Timbercreek Financial has a dividend yield of 8.5%.
This dividend stock pays cash every month
Since the lender earns interest on the mortgage every month, it passes on a portion of this interest to shareholders. At the end of June, it paid out 87.8% of its distributable income as dividends, even when its loan portfolio shrank due to high repayments. The payout ratio will reduce as the loan portfolio increases with more loan disbursals.
Timbercreek does not increase its dividends as it reinvests the money to give more loans. Around 60% of its business comes from repeat borrowers. It has a loan asset pool of $2.07 billion, of which $1 billion is financed from credit facilities and debentures. The lender’s strong balance sheet ensures it can continue paying dividends every month for the long term.
How to earn passive income
If you have five to seven years to retire, you can invest in Timbercreek’s dividend-reinvestment plan (DRIP). The DRIP will reinvest the $106 monthly dividend to buy more shares of Timbercreek Financial. Here’s a rough estimate of how your passive income will grow in seven years.
| TF Stock Price | Year | TF DRIP Shares | TF Share count | TF Dividend per share | Total Dividend Amount |
| $8.11 | 2024 | 1,849.0 | 1,849.0 | $0.6900 | $212.64 |
| $9.40 | 2025 | 22.62 | 1,871.6 | $0.6900 | $1,291.42 |
| $9.40 | 2026 | 137.38 | 2,009.0 | $0.6900 | $1,386.21 |
| $9.40 | 2027 | 147.47 | 2,156.5 | $0.6900 | $1,487.97 |
| $9.40 | 2028 | 158.29 | 2,314.8 | $0.6900 | $1,597.19 |
| $9.40 | 2029 | 169.91 | 2,484.7 | $0.6900 | $1,714.43 |
| $9.40 | 2030 | 182.39 | 2,667.1 | $0.6900 | $1,840.28 |
| $9.40 | 2031 | 195.77 | 2,862.8 | $0.6900 | $1,975.36 |
A $15,000 investment now will buy 1,849 Timbercreek Financial shares and earn $212.64 in dividends in the next two months. Assuming the highest stock price of $9.40, the $212.64 dividend will buy you 22.62 DRIP shares. In seven years, your share count could grow to 2,862.8 shares. Assuming the lender does not increase the dividend per share, your passive income will grow to $164.6 per month.
The actual income will likely be higher as the DRIP will buy stocks every month, and those DRIP shares will also pay dividends. Also, the share price may not be as high as $9.40. If the lender’s business boosts, it might increase dividends.
