TFSA Passive Income: Invest $5,000 Today, Earning $400 in 5 Years

Passive income should be just that: passive. So, make an investment just once and see how it can build without lifting another finger.

| More on:
money cash dividends

Image source: Getty Images

Passive income: it’s a popular phrase, yet many may not be aware of the true definition. While there are many investors seeking income through investing, they’re actively investing. That’s constantly buying and selling stocks to make an income.

This is risky for a few reasons. First, you never know if a potential growth stock is going to soar, as it could just as easily collapse. This puts your entire portfolio at risk. Unless you’re a fund manager, I wouldn’t recommend this kind of investing.

Instead, passive income is far simpler. It’s money you make passively — that is, it comes in without you doing anything. You buy the shares and leave them alone. That’s it. Today, we’re going to look at how you can make a large amount in just five years.

Invest what you can afford

First off, don’t think that investing is some get-rich-quick scheme. It certainly is not. It’s time in the market that could make you millions, not timing the market, as the trope goes. With that in mind, you certainly don’t want to start investing a whole whack of money with the hopes it will soar upwards.

Instead, invest what you can afford. For this example, let’s say that’s $5,000 per year. Now, I’m not saying you should simply cash out at the end of each year. Instead, put those funds aside each paycheque. If your goal is $5,000, then that means investing about $417 each month. But again, only do what makes sense to your budget.

Choose the rights stocks

Choose the stocks that make the most sense. To create passive income, that, of course, means creating money through dividends. There are blue-chip companies out there that have raised their dividends again and again over the last few decades — some on an annual basis. These are a great place to start.

For me, I like financial institutions and infrastructure right now. You’ll notice I didn’t say energy. That’s because oil and gas are going out, making them risky. Meanwhile clean energy is coming in, also making it volatile. Instead, I would choose something more solid.

You really cannot go wrong with a Big Six bank. I would recommend Toronto-Dominion Bank (TSX:TD)(NYSE:TD), which has a long track record of growth and performance. TD stock and its exposure in the United States is great for investors seeking a diversified portfolio. Further, TD stock and its growing online presence and options for do-it-yourself bankers gives it every opportunity to keep creating cash.

TD stock offers a 4.21% dividend yield that’s grown at a compound annual growth rate (CAGR) of 10.1% over the last decade. Shares are down 8.6% year to date, though they are up 209% in the last decade for a CAGR of 11.93%.

Creating passive income

Based on this historical data, we can see exactly how much passive income that could be made in five years with $5,000. Let’s say you were to invest that cash once and reinvest dividends over the next five years. If this were the case, you could double your portfolio to be worth $10,631!

Furthermore, you would now have increased your shares from 58 to 70. That would be about $400 in annual passive income you can look forward to! That’s not bad for one investment over just a few years.

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 TORONTO-DOMINION BANK. The Motley Fool has no position in any of the stocks mentioned.

More on Dividend Stocks

The TFSA is a powerful savings vehicle for Canadians who are saving for retirement.
Dividend Stocks

2 Magnificent Dividend Stocks I Plan to Add to My TFSA in June

Have you made your TFSA investments for June? If not, here are two dividend stocks you should consider adding for…

Read more »

Nuclear power station cooling tower
Dividend Stocks

Cameco Stock: An Excellent Uranium Play With Both Growth and Dividends

With clean energy demand continuing to grow, this stock might be a great long-term investment at current levels.

Read more »

edit Woman calculating figures next to a laptop
Dividend Stocks

Is it Too Late to Buy goeasy Stock?

Despite its monstrous gains, goeasy is a TSX dividend stock that trades at a compelling valuation in June 2024.

Read more »

A Canada Pension Plan Statement of Contributions with a 100 dollar banknote and dollar coins.
Dividend Stocks

Average CPP Benefits at 60, 65, and 70 in 2024: What to Expect

You can supplement your CPP benefits by holding Fortis Inc (TSX:FTS) stock in an RRSP.

Read more »

A worker gives a business presentation.
Dividend Stocks

Want an Extra $1,000 in Annual Income? Invest $15,000 in These 3 Unstoppable Stocks

Given their solid underlying businesses, excellent cash flows, and consistent dividend payouts, these three TSX stocks could boost your passive…

Read more »

A stock price graph showing growth over time
Dividend Stocks

2 TSX Stocks With Great Dividend Growth to Buy Now

Top TSX dividend stocks are on sale.

Read more »

Paper Canadian currency of various denominations
Dividend Stocks

Passive Income! My Top 2 Dividend Stocks for New Investors

These two top Canadian dividend stocks could help new investors create a reliable source of passive income that could last…

Read more »

Electricity high voltage pole and sky
Dividend Stocks

Fortis Stock: Should You Buy, Sell, or Hold Today?

Fortis is down 15% from the 2022 high. Is the stock now oversold?

Read more »