As you sow, so shall you reap. You can’t expect apples if you plant a peach tree. Most people lose money in stocks because of unrealistic expectations. The stock market has something for everyone. There are growth stocks that could make a $5,000 Tax-Free Savings Account (TFSA) portfolio into $50,000 in five years, and there are stocks that could give you passive income. Invest in stocks knowing what to expect from them.
The math: Converting $500/month to $51,000 +$213/month in passive income
Create a desired outcome of a $51,000 TFSA portfolio that gives $200 in monthly passive income. Once you have a realistic outcome, you can check what is available.
The Toronto Stock Exchange has some good dividend stocks paying an average annual yield of 5%. Some real estate stocks also pay dividend yields more than a 7%. But it is better to take a conservative estimate.
Suppose you start investing $500/month in 2023, accumulating $6,000 by the end of the year.
In 2024, your $6,000 will earn you $300 ($6,000 x 5%) in dividend income. If you invest through TFSA, you can reinvest the entire $300 without worrying about taxes. By the end of 2024, you will invest an additional $6,000 and get $300 in dividend income.
At the start of 2025, you will have $6,300 from 2023 and $6,000 from 2024, which will fetch you a 5% dividend income of $615. If you continue this cycle for seven years, you can earn $213 in monthly passive income, or $2,564.7 annually, and have a portfolio of over $51,000.
Which stock can help you achieve $51,000+$213/month in passive income?
The TSX has Dividend Aristocrats, like BCE (TSX:BCE), Enbridge, and TC Energy, that have histories of paying regular dividends but have also grown them for more than a decade. Pipeline stocks like Enbridge and TC Energy have slowed their dividend growth, but telecom giant BCE is heading strong with 5% dividend growth and has a five-year average dividend yield of 5.5%.
The bearish market that began in March 2022 with an interest rate hike has pulled BCE stock down 17%. The stock price dip pulled the dividend yield to 6.37%. Now is a good time to invest a larger amount and lock in a higher dividend yield before the stock rebounds. The stock also offers a dividend-reinvestment plan (DRIP) that can automate the reinvestment part. The 5% dividend growth could help you reach your 51,000+$213/month passive-income goal faster.
But it is not wise to invest all your money in one stock. BCE is facing competitive pressure from the merger of Rogers and Shaw Communications. Diversify across asset classes.
You can invest money in high-dividend retail or commercial real estate investment trusts (REITs) like True North Commercial REIT (TSX:TNT.UN) or renewable energy stocks like TransAlta Renewables.
True North Commercial REIT has 47 commercial properties with a 95% occupancy rate. It earns 80% of its monthly rental income from the government and high-credit-ranking companies. However, rising interest rates have reduced the fair market value of REIT properties. Rising rates have reduced the REIT’s ability to raise capital against its properties but has had no impact on its operating cash flow. Hence, it maintained its monthly distributions at $0.0495 while the stock has fallen over 16% since March 2022.
The stock price dip inflated the REIT’s distribution yield to 9.7%. With high yield comes a greater risk of a distribution cut. Until the REIT slashes the distribution yield, you can enjoy a higher yield.
Remember, the above expectations are based on the current market conditions. They could change with changing scenarios. So, keep revisiting your portfolio frequently and update your expectations accordingly. Exit when the stock can no longer give you the minimum growth and dividend you expect from the stock.