MENU

First Brexit… then Trump… Now, it’s time for Pro

Is your portfolio really prepared for what’s coming next?

To help investors like you navigate this historically uncertain — yet high-flying — market and prepare for an inevitable downturn, we’re re-opening our Motley Fool Pro Canada service to a select few new members for a short time.

To discover how Pro Canada could help you to increase your upside potential… reduce your downside risk… and earn paycheque-like income in the process, simply click here — before the small number of spots we have left are all gone!

How You Can Retire Early

Just about everyone would like to retire early. You must either amass enough savings, or you have to develop other means to generate a passive income that you can live on.

Personally, I think having savings is not good enough. These savings should be earning something (excluding the three months to three years of cost of living savings that’s used for emergencies). Other than your emergency fund, the rest of your savings could be generating a passive income stream for you.

Here’s how you can retire early.

Spend less than you earn

Before you can save to buy assets that generate passive income, you first need to spend less than the amount you earn. Statistics Canada found that the median income earned by a Canadian in 2013 was $32,020. Applying a 3% inflation rate, we arrive at a median income of $34,990 this year.

Assuming you earn the median income, if you’re able to save $3,499 (or 10%) of that every year (equating to $292 a month), you’ll save $34,990 in 10 years. Once you make a habit of spending less than you earn, it should be very easy to save.

If you’re able to earn a 5% rate of return for the $3,499 you save every year, you’d amass $46,210, which is $11,220, (or 32%) more than if you just hid the money under the carpet.

Build a passive income stream

The more you save and the higher the rate of return, the larger the amount of savings you will amass.

Let’s say we stick with the 5% return. Where can we get that today?

You’ll be thrilled to know that some dividend stocks offer that 5% return from dividends alone. That’s right! Without having to worry about where the stock price might go, you can get dividend cheques paid to you regularly.

At $38.7, National Bank of Canada (TSX:NA) yields 5.6%, which is higher than the 5% we wanted. Its payout ratio is about 46%, so its dividend is sustainable.

Brookfield Infrastructure Partners L.P. (TSX:BIP.UN)(NYSE:BIP) is a diversified utility with quality assets that generate stable cash flows to support its distribution. Its annual payout is US$2.28 per unit (equating to US$0.57 per quarter). Using a foreign exchange of US$1 to CAD$1.25, it yields 5.7% at $50.1 per unit. Its payout ratio is sustainable around 70%.

Brookfield Infrastructure pays distributions that can consist of interest income, foreign-sourced dividends, locally sourced dividends, eligible and qualified dividends, and capital gains. So, it’s better to hold it in an RRSP or TFSA instead of in a non-registered account.

The last BIP distribution I received in my TFSA had a negligible amount (15%) withheld because a teeny weeny portion of the distribution was U.S. dividends.

These two companies are a good start in building a passive income stream. Once your diversified passive income stream is bigger than your job’s income, you can retire.

Conclusion

It’s never too early to start saving and investing for retirement. Keep in mind to spend less than what you earn and use those savings to build a passive income stream.

Want more top dividend stocks?

These three top stocks have delivered dividends for shareholders for decades (and even centuries!). Check out our special FREE report: "3 Dividend Stocks to Buy and Hold Forever". Click here now to get the full story!

Fool contributor Kay Ng owns shares of Brookfield Infrastructure Partners.

NEW! This Stock Could Be Like Buying Amazon In 1997

For only the 5th time in over 14 years, Motley Fool co-founder David Gardner just issued a Buy Recommendation on this recent Canadian IPO.

Stock Advisor Canada’s Chief Investment Adviser, Iain Butler, also recommended this company back in March – and it’s already up a whopping 57%!

Enter your email address below to claim your copy of this brand new report, “Breakthrough IPO Receives Rare Endorsement.”

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.