Passive income is the dream. You just have to sit and wait as cash piles up, just waiting for you to spend.
But getting paid for doing nothing is easier said than done. It requires patience, skill, and a little luck. By following the steps below, you can maximize your chances of success.
This is your first step
If you want to build a passive-income stream, you have to think smart. Take advantage of every avenue. That’s why TFSA investing is a must.
TFSAs protect your money from taxes. Capital gains and dividends all accrue without ceding a penny. Avoiding taxes can cut years off your investing time horizon.
Most people skip straight to stock picking, but smart investors establish a TFSA first, and make sure to maximize contributions every year.
Passive income requires passive investing
There’s no getting around one fact of life: it takes money to make money. If you want to receive cash payments for doing nothing, you first must pay into the system.
The best way to build a sizable nest egg is by automating your contributions. Want to eventually receive $1,000 passive income every month? Start by investing $1,000 every month.
If that figure is too high based on your current income and budget, try a smaller number. A contribution of just $100 per month is enough to get you started. The trick to passive income is consistent contributions, not herculean feats every once in a while.
If you max out your TFSA contributions and earn 10% annual returns, you’ll reach the $1 million mark after 30 years. That’s enough money to generate $100,000 in annual income!
You don’t need to wait as long if you’re just looking for passive income of $10,000 or $20,000 per year, but it’s amazing how small but steady contributions compound over time.
Make sure to buy stocks like this
Invest with a TFSA. Make consistent contributions. These two steps will put you on the path to passive income.
The final step is to buy stocks that can generate double-digit annual returns over many years. You want to diversify, owning an entire basket of rewarding stocks, but a good place to start is a business like Hydro One (TSX:H).
There are few stocks more reliable than Hydro One. It’s a utility company, delivering power to customers across Ontario. Its power lines cover 98% of the province. That market power comes with regulated prices. This sounds bad, but it isn’t at all. Hydro One usually knows its pricing years in advance, meaning a surprise recession won’t hurt profits.
In many ways, Hydro One has a monopoly over its market. That’s why its prices are regulated, but they’re still high enough to support a 3.5% dividend, plus 5% annual rate base growth.
If you’re looking to build a passive-income stream, look for stocks like this. The company’s competitive advantages won’t wane for a long time. In both bear and bull markets, this stock is capable of producing positive returns.
Consistent passive-income streams require consistent stocks — ones that can deliver for decades to come.
Our top passive-income stocks are on the list below.
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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 Ryan Vanzo has no position in any stocks mentioned.