Your financial independence depends on your ability to generate more passive income than your cost of living. Unfortunately, the cost of living is rising rapidly. Meanwhile, dividend and rental yields are declining. The typical rental property in Canada is likely to be cash flow negative, while dividend stocks pay 2-3% on average.
These unfortunate circumstances have pushed some investors to take on more risk. Risky tech stocks, Decentralized Finance (DeFi) products, and volatile alternative assets have become more common in the hunt for passive income. However, there is a better way. Here are two unconventional strategies that can help you boost your passive income while mitigating risk.
Systematic withdrawal plans
Most major banks and investment platforms will allow you to implement a systematic withdrawal plan. The plan allows you to sell a predetermined portion of your stocks every year to take some profits off the table. In other words, you get to tap into capital gains to boost your passive income.
For this to work, you need to focus on a blue-chip dividend stock with a healthy and predictable rate of growth. Fortis (TSX:FTS)(NYSE:FTS) is an excellent example. The utility giant experiences steady growth as Canada’s population expands and electricity consumption increases.
The stock has delivered a 43% return over the past five years, which is a compounded annual growth rate of 7.4%. If you implemented a systematic withdrawal plan of 3%, you could boost your passive income without eroding capital over time. Coupled with the dividend yield (which is 3.6% right now), you could have doubled your total cash flow from this investment.
In the years ahead, the Fortis team expects to expand earnings by 4-6% annually. That means it’s still an excellent candidate for a long-term systematic withdrawal plan.
Covered calls
Here’s another niche strategy to boost passive income: covered calls. This strategy involves writing call options on stocks that you plan to hold for the long term. It allows you to hold onto your stock, collect dividends, and also collect the premiums paid by traders over time.
Now, implementing this strategy by yourself could get complicated. You’ll need to buy stocks and write call options independently, which isn’t recommended if you’re a beginner. Luckily, there’s a more convenient option — covered-call exchange-traded funds (ETFs).
The ETFs trade like regular stocks but offer a much greater yield than their vanilla counterparts. For instance, BMO Equal Weight Banks Index ETF, trading under ticker ZEB, and BMO Covered Call Canadian Banks ETF, trading under ticker ZWB, both focus on Canadian banks. But the former offers a 2.9% dividend yield, while the latter offers a 5.4% yield. That’s a large difference, based on a simple options strategy.
If you’re bullish on Canadian banks but also want to boost passive income, switching from ZEB to ZWB could be a savvy decision.
Bottom line
Simple strategies like covered calls and systematic withdrawal plans can help you boost passive income without raising risk exposure.
