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.