Forget Passive Income: Choose This Investment Strategy Instead

Passive income is definitely great to use up front, but this other strategy can create significant wealth in the millions!

| More on:
Road signs rerouting traffic

Image source: Getty Images.

Passive income has been a popular topic these last few months. The TSX remains a volatile place to trade for those hoping to get in, make cash, and get out. So, it’s clear why some investors are seeking passive income to make up for their losses.

However, while this is a great short-term strategy, in the long term, it’s not in your best interest. By finding the right companies, you can instead create large wealth through this other strategy.

It’s not timing. It’s time in

As the investment trope goes, it’s not timing the market, but time in the market that creates wealth. That’s the key when it comes to create wealth, and yet it’s something many investors forget — especially when they’re considering passive-income stocks.

Passive income is great. And I’m absolutely recommending you find companies that provide it through dividends — not to mention returns. But instead of using that cash every month or every quarter to pay for bills, go on vacation, or whatever else you have planned, reinvest it.

This is where you can create significant wealth, and it can be the difference from retiring at 60 or 70. Truly! By combining compound interest and reinvesting passive income, you can create an insane amount of wealth.

Let me show you how.

Find the right stock

First off, you have to find the right passive income stock. For me, I’d look at commodities. This is an area that will continue to perform, even during market downturns, or at least recover quite quickly. Energy has been a great investment for decades, but it’s starting to shift. This creates a new opportunity to see higher growth in at least the first few years, while you also reinvest your passive income.

For me, I would look at Brookfield Renewable Partners (TSX:BEP.UN)(NYSE:BEP). Brookfield owns renewable energy infrastructure all around the world and has been expanding its presence in Europe as well. There’s newfound interest after the stock hit all-time highs in January 2021 and then slumped back. But it’s still a great deal on the TSX today.

Brookfield is a passive-income stock offering a dividend of 3.26% as of writing. Shares are up 2,076% in the last two decades for a compound annual growth rate (CAGR) of 16.63%. It also offers safety with a total debt-to-equity ratio at 91.7%. And as clean energy expands, it’s only set to do even better.

Putting it together

Let’s say you have a Tax-Free Savings Account (TFSA) that you wanted to max out at $6,000 each year. You start out with a $20,000 investment in Brookfield stock and reinvest every penny of your passive income through dividends. A $20,000 investment would bring in about $653 per year as of writing.

So, now, you’re purchasing $6,000 more every year and reinvesting dividends as you go. Then let’s say you continued this method for 30 years to reach retirement. By that time, with reinvesting income, you could have $6,397,494 from a total investment of $200,000 of your own money based on historical data. Also, that’s compared to $4,900,396 if you were to invest and not reinvest your dividends.

So, there you have it, that’s the power of passive income. By reinvesting your shares, you can create insane wealth down the line. Now, this, of course, is just an example, as you should have a more diversified portfolio. Yet it does show what can happen if you let time in the market be your guide.

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 has positions in Brookfield Renewable Partners. The Motley Fool has no position in any of the stocks mentioned.

More on Energy Stocks

Burning gas and electric cooker rings
Energy Stocks

With Natural Gas in Demand, 2 TSX Stocks Are Set to Heat Up

Natural gas stocks such as Tourmaline will see their fortunes rise as natural gas demand and prices rise.

Read more »

Gas pipelines
Stocks for Beginners

3 Reasons to Buy Enbridge Stock Like There’s No Tomorrow

Enbridge (TSX:ENB) is a superb long-term option. Here's why you should buy Enbridge stock right now and hold it for…

Read more »

potted green plant grows up in arrow shape
Energy Stocks

1 Ridiculously Undervalued Growth Stock Down 40% to Buy Hand Over Fist

Don’t miss your chance to load up on this high-yielding, renewable energy growth stock.

Read more »

A solar cell panel generates power in a country mountain landscape.
Energy Stocks

1 Renewable Energy Stock to Buy and Hold

Here's why Brookfield Renewable (TSX:BEP.UN) is a top renewable energy stock long-term investors should consider.

Read more »

financial freedom sign
Energy Stocks

Could Investing $10,000 in Enbridge Make You a Millionaire?

A top-tier dividend stock can help you accumulate wealth or become a millionaire over time.

Read more »

Aerial view of a wind farm
Energy Stocks

Brookfield Renewable Stock Climbs Higher: Time to Buy?

Brookfield Renewable stock (TSX:BEP.UN) continues to climb, but remains below the $40 mark. But that share price looks in view.

Read more »

Nuclear power station cooling tower
Energy Stocks

Up 35%, Is Cameco Stock a Buy in June 2024?

When a stock is bullish, and you have missed the starting point of the trend, it can be challenging to…

Read more »

Oil pumps against sunset
Energy Stocks

4 Top Energy Stocks (With Dividends) to Buy and Hold Forever

These four energy stocks are the best way to get in on long-term income from both growth and dividends.

Read more »