ENB:CC - Want to Make $10000 in Passive Income This Year? Invest $110000 in These 3 Ultra-High-Yield Dividend Stocks

2024-03-19 20:45:00 ET

The stock market has been harsh on dividend stocks lately amid panic around prolonged high-interest rates. Many dividend aristocrats have significant debt. They are handling their debt maturities by issuing new bonds or debentures at a higher interest rate. This has increased their interest expense even though more than 80% of their debt is a fixed rate. The high interest rate burden is eating up profits, making investors fearful of a dividend cut. And all this comes even when the economy has not officially fallen into a recession yet.

An opportune time to buy three ultra-high yield dividend stocks

The market bearishness has created an opportunity for value investors to invest in some fundamentally strong dividend stocks and lock in ultra-high yield as the stock prices trade low.

BCE stock

BCE ( TSX:BCE ) stock is making new lows amid weakness in the telecom sector due to regulatory concerns. The telecom regulator wants the big telcos to give competitors temporary access to their fibre-to-the-home networks in Ontario and Quebec. BCE is fighting against this decision.

The regulator’s decision comes when BCE and Telus are spending billions of dollars on building the network infrastructure while taking on debt at a higher interest rate. Since 2020, Bell has invested nearly $19 billion to build the fibre network. High capital spending increased its leverage and interest rate and affected its net profit.

For 2024, BCE expects its free cash flow to fall by 3 to 11% as it undergoes restructuring with 4,800 job cuts and one-time severance payouts. It paid 111% of FCF as dividends in 2023. The question is, can it sustain its 3% dividend growth in 2024 amid declining FCF? In the worst-case scenario, BCE might pause dividend growth for the next few years or temporarily reduce the dividend frequency as it did in 2008.

However, the company will make up for it once the restructuring is over and it starts realizing the 5G potential. If you look at BCE’s dividends in the long term, they give normalized passive income.

Other dividend stocks

Unlike BCE, Enbridge ( TSX:ENB ) and Slate Grocery REIT ( TSX:SGR.UN ) are doing relatively well with no headwinds. Enbridge stock is going through its normal cyclicality as oil prices ease. The company is undergoing a large acquisition of three gas utilities in America that could increase its size and debt. However, given its low-risk business model and predictable cash flow, the pipeline company can service its debt. It continues to grow its dividend by 3% while keeping the payout ratio within the target range of 60 to 70%. Now is a good time to buy this dividend stock at $48 and lock in a 7.6% yield.

Slate Grocery REIT is another resilient passive income stock that can continue to give payouts from its rental income. It has a resilient business model, as most of its tenants are grocers. They are not affected by economic cycles, making them sticky tenants.

Moreover, less construction activity helps the REIT charge a higher rent. In 2023, it enjoyed a rental spread of 10.4%, its highest since 2018. The REIT is paying 81% of its FCF as distributions, which means its payouts are safe. However, its unit price has been falling as declining property prices reduced the fair market value of its portfolio. You can lock in an over 10% yield.

How to earn $10,000 in passive income this year

Below is a table of how you can start earning $10,000 in passive income this year by investing $110,000 in the above three stocks.

You can change the investment amount as per your risk-bearing capacity. And if you cannot invest such a large amount in one go, you can invest small amounts throughout this downturn. Value investors keep buying whenever their preferred stocks fall to their target price.

A $110,000 investment in the above ratio stocks help you lock in a 9.06% yield that is well-diversified.

The post Want to Make $10,000 in Passive Income This Year? Invest $110,000 in These 3 Ultra-High-Yield Dividend Stocks appeared first on The Motley Fool Canada .

Fool contributor Puja Tayal has no position in any of the stocks mentioned. The Motley Fool recommends Enbridge, Slate Grocery REIT, and TELUS. The Motley Fool has a disclosure policy .

2024