A friend of mine recently told me how he is bored with his stereotypical job and plans to retire early. He had a couple of things planned to generate income in his sunset years, like renting out a car or buying an annuity. However, he is concerned about the lower cash inflow and inflexibility.
Passive income and TSX stocks
One of the best passive-income sources Canadians have is to invest in dividend stocks. Many of us ignore stock markets, because they are perceived as high-risk avenues. They are indeed riskier than a high-interest rate savings account. But many have still created a big fortune by investing in the right stocks over time, and that too with a little risk.
Passive income is what you generate, even while you are sleeping or holidaying. One does not need to have a large upfront investment to start investing in dividend stocks.
Many of us have been saving a lot on commutes or eating out due to the pandemic. If one combines that with some savings and regularly invests in TSX stocks for the long term, it will create a large reserve for their retirement.
For example, if one manages to save and invest $500 monthly in an average returning TSX stock, they will make $87,000 in a decade and $275,000 in 20 years.
Let’s take a moment to appreciate the power of compounding here. You are investing $60,000 and $120,000 in those respective cases. But interestingly, as the time of investment doubles, the reserve at the end of 20 years more than triples.
Creating wealth through long-term investing
Notably, we have assumed an 8% return in the above calculation — an average long-term return for Canadian stocks. However, let’s say your stock manages to beat broader markets and returned 12% on average for the next 20 years. Then your investment of $120,000 will grow to $432,000 in two decades.
There are many TSX stocks that have delivered an average return of 12% over the longer term. For example, telecom giant BCE (TSX:BCE)(NYSE:BCE) has returned a little higher than 12% in the last decade.
BCE is comparatively a low-risk stock, because of its stable operations and visible earnings. Additionally, telecom stocks like BCE are expected to begin a renewed growth story with emerging 5G technology. As the company manages to grow its earnings, shareholder payouts will also increase.
An investment of $432,000 in BCE would generate $25,000 in dividends per year (that’s more than $2,000 monthly).
It’s not prudent to invest a large sum into a single stock. The stock-specific risk gets evened out when we diversify.
Another top dividend stock Canadians can consider is TC Energy (TSX:TRP)(NYSE:TRP). It has been paying consistently growing dividends for years. It yields nearly 6% — almost double the TSX average. If an investor puts $432,000 in TC Energy stock, they will generate $24,192 in dividends per year.
TC Energy is one of the biggest energy midstream and utility companies. Interestingly, it earns stable revenues irrespective of volatile crude oil prices.
Most would-be retirees shun stock markets, as they overreact to the volatility. However, investing is the most convenient and cost-effective way of generating passive income and creating wealth.
Are you a fan of dividend stocks?
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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 Vineet Kulkarni has no position in any of the stocks mentioned.