The average hourly wage in Canada is $18. So, generating $22 in passive income every day is like adding more than an extra hour of salary without the additional work. That passive income tends to steadily expand over time to a point where you can simply retire and never have to work again.
Here are three ways you can get started with as little as $100,000 in capital.
Collecting rents from real estate investments is the most common form of passive income, simply because it’s so easy and accessible for the average investor. A $100,000 down payment should allow you to access a $400,000 mortgage and purchase a $500,000 property. With a rental yield of about 4%, you can expect to generate $55 in gross rents everyday.
Even after you account for mortgage interest, repairs, maintenance and taxes, your net income should be around $22 per day, depending on where your property is located.
However, buying and managing a house isn’t entirely passive, which is why I prefer publicly listed real estate investment trusts (REITs) or high-yield dividend stocks instead.
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By investing in REITs and dividend stocks, you obviously forego the power of leverage you would have had on a rental property. However, the yield on these investments is usually much higher, and there’s nearly no work involved, making the income truly passive.
Inovalis REIT, for example, offers a dividend yield of 7.7%. On a $100,000 investment, that could mean $21 in daily passive income. Meanwhile, high-yield dividend stocks like Inter Pipeline and Alaris Royalty offer dividend yields in excess of 8% if you buy them at the right price.
If you’re skeptical about investing in REITs or companies that you’ve never heard of before, that’s perfectly understandable. Higher dividend yields can sometimes mask underlying risks that you may not like exposure to. In that case, there is another strategy to generate passive income.
Blue-chip dividends and systematic withdrawals
Well-known and rock-solid mega-corporations like BCE and CIBC also offer lucrative dividend yields. BCE, for example, offers a 5.2% dividend yield at the moment, while CIBC offers 5.3%.
But on a $100,000 investment, a 5.3% dividend yield only amounts to $14.5 in daily passive income. To enhance this income, you may need to offload and withdraw your initial investment.
According to personal financial experts, a 4% annual withdrawal rate is usually sustainable, because the stock market tends to appreciate at an average annual rate higher than that. This means you can safely sell $4,000 worth of stocks every year from your $100,000 portfolio, pay yourself a daily passive income of $11, and never run out of money.
Combine this systematic withdrawal and annual dividends from blue-chip companies, and your daily passive income could be as high as $25 a day.
I truly believe that anyone can generate a modest passive income, perhaps $22 a day, right away with the right strategy. While most investors prefer rental properties, I prefer REITs and high dividend stocks to create my financial independence.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
The Motley Fool recommends ALARIS ROYALTY CORP. and Inovalis REIT. Fool contributor Vishesh Raisinghani has no position in any of the stocks mentioned.