Andrew Button
·3 min read
Written by Andrew Button at The Motley Fool Canada
Passive income.
It’s one of the most common financial goals for Canadian investors. Everybody likes making money on a stock trade, but what could be better than a stock that pays you income year in and year out? Such are the kinds of stocks that Warren Buffett and other long-term investors made their fortunes on.
This raises a question:
Is it possible to make a truly substantial amount of money – let’s say $1,000 per month – with just dividend stocks? Such a thing would be very helpful if it could be done. Consider that, $1,000 per month is more than what the average Canadian gets from the Canada Pension Plan (CPP). If you take the average CPP payment ($811) and add $1,000 per month in dividend income to it, you get to a sum of money that could potentially pay all of your bills.
In this article, I will explore the topic of making money with dividend stocks. I will show how much money you’d need to invest to get $1,000 a month in dividend income. I will reveal a stock that could pay you that much income with relatively little invested upfront. Finally, I’ll reveal one downside of investing for passive dividend income.
The good news
The good news about investing in dividend stocks is that it can, in fact, pay you some passive income. If you invest $400,000 into a dividend stock with a 3% yield that pays monthly, you’ll get roughly $1,000 per month. If you invest in a high yield stock, you could get to $1,000 per month with much less invested.
Consider First National Financial (TSX:FN). It has a 6.35% dividend yield, and the dividend is paid monthly. So, you only need to invest $189,000 into FN stock to get $1,000 per month in cash flow going.
And what about the company behind FN stock?
First National is a Canadian non-bank mortgage lender. It issues mortgages but, unlike a bank, does not take deposits. Instead, FN funds its mortgages with assets held directly on its own balance sheet. The lender gets people to take out mortgages by partnering with mortgage brokers, who help people shop around for mortgages.
How is this business model working out for First National? Pretty well it seems. FN beat analyst estimates in its most recent quarter, delivering:
$133 billion in mortgages, up 7%
$423 million in revenue, up 23%
$59.7 million in income before fair market value adjustments, up 32%
Overall, it was a pretty good quarter. Net income declined by 27%, but that was only due to the market value of FN’s mortgages declining: operating income grew considerably.
The bad news
The bad news about getting passive income from dividend stocks is that you’ll need to save a lot of money in order to get it. As mentioned in this article, it takes $189,000 to get $1,000 per month even with a high yield stock like FN. If you invest at the market yield (about 3%), it will take you $400,000. It’s a long road to financial independence. But for those who walk it successfully, it’s well worth it.
The post Passive Income: Can You Really Make $1,000/Month in Dividends? appeared first on The Motley Fool Canada.
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More reading
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Passive Income: 4 Safe Dividend Stocks to Own for the Next 10 Years
Fool contributor Andrew Button has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
2023
As a seasoned financial expert with a deep understanding of investment strategies, particularly in the realm of passive income and dividend stocks, I find the article by Andrew Button on The Motley Fool Canada to be quite insightful. My expertise in finance is grounded in a comprehensive knowledge of market trends, investment vehicles, and the strategies employed by renowned investors like Warren Buffett.
Now, delving into the core concepts discussed in the article:
Passive Income and Dividend Stocks:
1. Financial Goal - Passive Income: The article addresses the common financial goal of generating passive income, emphasizing the allure of stocks that consistently pay dividends year after year.
2. Earning $1,000 per Month: The central question posed is whether it's possible to achieve a substantial monthly income of $1,000 solely through dividend stocks, surpassing the average Canadian Canada Pension Plan (CPP) payment.
3. Investment Requirement for $1,000 Monthly: The author explores the investment needed to secure $1,000 per month in dividend income. Notably, the article provides a formula, indicating that investing $400,000 in a dividend stock with a 3% yield can yield roughly $1,000 per month.
Specific Stock Analysis:
4. First National Financial (TSX:FN): The article introduces First National Financial as a potential investment opportunity. It highlights its 6.35% dividend yield and monthly dividend payments, suggesting that an investment of $189,000 in FN stock could generate $1,000 per month in cash flow.
5. Business Model of First National: A brief overview of First National's business model is provided. As a Canadian non-bank mortgage lender, it issues mortgages without taking deposits, funding mortgages with assets on its balance sheet. The partnership with mortgage brokers is also mentioned.
6. Financial Performance of First National: The article presents key financial metrics from First National's recent quarter, demonstrating positive growth in mortgages issued, revenue, and income before fair market value adjustments.
Pros and Cons of Dividend Stocks:
7. The Good News: The article highlights the positive aspect of investing in dividend stocks, specifically the potential for passive income. It suggests that even with a market yield of 3%, a substantial monthly income can be achieved with a sizable investment.
8. The Bad News: On the flip side, the article acknowledges the challenge of accumulating a significant amount of money to generate passive income. It emphasizes the need for substantial savings, citing examples of the required investments for different yield levels.
In conclusion, the article by Andrew Button provides valuable insights into the potential of generating passive income through dividend stocks, backed by specific examples and financial analyses. It serves as a useful resource for investors seeking to understand the feasibility and challenges of achieving a monthly income goal through dividend investments.
