Getting $500 in extra income each month can make a huge difference. It can help you meet daily expenses, pay down debt, or build an emergency fund.
You can even reinvest this income back into the market, helping you meet your long-term investment goals. Additional monthly income is a great advantage, but how do you get there?
Unless you win the lottery or already have a sizable nest egg, building a passive income stream takes time. After all, it takes money to make money. Your passive income stream will depend on two factors:
- How much you have saved
- How much interest you earn on those savings
At a 3% interest rate, you’d need $200,000 to generate monthly income of $500. At a 5% interest rate, you’d need $120,000. Those are reasonable targets, but with the right stocks, you can generate more than $500 of income per month with a smaller initial savings amount.
Stage 1: Save
Recently, I designed a bulletproof basket of stocks that generated a $519 passive monthly income stream with just $80,000. That’s a sizable starting position, but it’s not as big as you might think.
For me, I stashed away roughly $5,000 per year ($416 per month) for around 10 years, earning the long-term annual stock market return of 8%. Saving dutifully for a decade was difficult, but I had a lot of help by using automated savings techniques.
Now, I’ll have a generous monthly stipend for the rest of my life – and that’s not even accounting for the investment principle.
Assuming 0% capital gains, I’ll still have $80,000 in savings even after decades of taking my monthly distribution! Upon retirement, I can double my monthly income amount and still have more than 15 years of runway. My “free” monthly income is the result of the following dividend stock picks.
Stage 2: Invest
When building a passive income stream with dividend stocks, it’s important to weigh two critical factors: the size of the dividend and the durability of the dividend. If your dividend stocks only pay 2%, you’ll need a significantly larger nest egg to generate adequate monthly returns.
But higher dividends often require a trade-off for increased risk. What’s the use of a high dividend yield today if it’s cut next year? Balancing the payout and its stability is key.
I’ve covered the following three companies for years and have seen firsthand how durable their business models are. Plus, they offer a blended average dividend yield of 7.8%!
An $80,000 initial savings amount accruing 7.8% in annual dividends would generate roughly $519 in passive monthly income. Here’s why I chose the following stocks.
Enbridge Inc. (TSX:ENB)(NYSE:ENB) is my favourite monopoly stock. The company owns the largest pipeline network in North America and helps transport more than 20% of the continent’s crude oil and natural gas.
Roughly 98% of its cash flows are tied to fixed-price or regulated contracts, which means it has almost zero exposure to commodity prices. Its 6.5% dividend is fully backed by internal cash flows.
Chemtrade Logistics Income Fund (TSX:CHE.UN) is the highest-yield stock on this list at 11.6%. If you think that’s unsustainable, think again. Chemtrade has paid out the same distribution for more than 13 years without ever cutting the payout.
On the latest conference call, its CEO noted that “we don’t see any problem with sustaining our dividend and we plan to actually keep paying it.” Given its decade-plus history of execution, I’ll place my bets with management.
CT Real Estate Investment Trust (TSX:CRT.UN) yields just 5.2%, but it has a bulletproof business model. The company was carved out of Canadian Tire to manage its properties, hence the name.
While its success hinges on a single client, Canadian Tire remains one of Canada’s most trusted and reliable brands. That means CT Real Estate typically has occupancy rates close to 100%, and if a recession hits, it doesn’t need to worry about attracting new clients.
My current portfolio is positioned to take advantage of a major growth opportunity happening on the TSX, but I plan to pivot to this durable portfolio again when the additional income is needed.
