It might sound like a trick, but given the right investment, Canadians can absolutely create a solid passive-income portfolio on just $100 per month. The key here is twofold. You need to make automated payments and watch the gold that is compounding.
Then, of course, there’s having the right portfolio to make all this happen. That’s where the Tax-Free Savings Account (TFSA) comes into play. If you invest using the TFSA, all of the returns and dividends you create from your investments will be tax free. So, if you don’t have a TFSA, make sure you open it immediately — not just for the purpose of this article, but for your investment future.
Whether you’re a millennial or a retiree, opening a TFSA and making automated payments into that TFSA can only do you good. What I like to recommend is if you have a pay cheque coming in on a regular basis, take 10% and put that aside. If you’re retired, you can still do this with your Registered Retirement Savings Plan (RRSP), Canada Pension Plan (CPP) and Old Age Security (OAS) each month. Just combine the total and take 10% of that to invest. Then put that into your TFSA! But if you can only afford $100 per month, this can still work just fine!
Now, I’m not necessarily saying you should then invest every month. In fact, that’s a lot of trading, and that’s not really what the TFSA is for. Instead, have a few stocks on your watchlist and wait until there’s a dip. Then buy it up in bulk! Then here’s the key: you need to hold onto investments for long periods of time. That way, you’ll see the compounding interest happen over years — even decades!
A strong example
Let’s use Pembina Pipeline (TSX:PPL)(NYSE:PBA) as an example. This company is going to be strong over the next few years and decades. That’s because it’s providing the solution to the current energy crisis, trying to get trapped oil out of Alberta. When that starts happening on a large scale, Pembina’s growth projects will see its shares and revenue soar!
And, of course, Pembina offers a monthly dividend. You’ll need that for this to work. Right now, the company offers 7.61% dividend yield that’s dished out every month. That dividend remains strong, supported by the company’s growth projects and long-term contracts.
Now, let’s say you have $100 to put into Pembina each month. You then invest that into the stock for 20 years. That will bring your total investment to $24,000 into the stock over that time. However, then start looking at Pembina’s performance. If you look at the last 20 years, Pembina has grown by 317% as of writing in that time. That’s without including its highs back in January.
Then there’s the dividends to consider. If you take those dividends and reinvest them in Pembina, you can have dividends and compound interest working for you. So, if shares grow by 317% again and you reinvest dividends, that could turn your $24,000 investment into $140,401.77!
But what about your monthly dividend? That will start out low, it’s true. The first year, from a $1,200 investment, you’ll bring in $92, which is only $7.63 per month. But, from a $140,401.77 investment, that will turn out about $25,000 in dividend income should the same rate of growth happen! That’s a whopping $2,083 per month!
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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.
Fool contributor Amy Legate-Wolfe owns shares of PEMBINA PIPELINE CORPORATION. The Motley Fool recommends PEMBINA PIPELINE CORPORATION.