3 Passive-Income Ideas to Build Long-Term Wealth

Set up to earn multiple passive-income streams to complement your active income. Dividend stocks are an excellent way to start.

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Wouldn’t it be nice to execute multiple plans to earn several streams of passive income? Sounds great, doesn’t it? There’s no free lunch, though. At least, initial active work is required. Here are some ideas to allow you to generate passive income — as passive as income making can get!

Dividend stocks

Solid dividend stocks that tend to increase their dividends are an excellent source of growing passive income. For example, buyers of Fortis (TSX:FTS) stock has not been disappointed with a growing passive income for about 50 years.

The defensive utility stock’s 20-year dividend-growth rate is 7.8%. An investor who bought shares 20 years ago (and did not buy any more shares after that) would have seen their initial yield on cost of about 4% grow to about 17.5%. In other words, if an investor who earned $1,000 of passive income from Fortis stock 20 years ago, they would make about $4,375 of passive income today from the same investment! This is a prime example of the power of persistent dividend growth.

Today, Fortis stock yields 4.15%. And management projects dividend growth of about 5% over the next few years. In non-registered accounts, the stock pays out eligible Canadian dividends that are taxed at a lower rate than your ordinary income.

Canadian REITs

Canadian real estate investment trusts (REITs) is a passive way of investing in real estate. They primarily earn rental income and pass on much of the earnings from their real estate properties to their unitholders.

Their cash distributions are like dividends but are taxed differently. In non-registered accounts, the return of capital portion of the distribution reduces the cost base. The return of capital is tax deferred until unitholders sell or their adjusted cost base turns negative. 

REIT distributions can consists of other income, capital gains, and foreign non-business income. Other income and foreign non-business income are taxed at your marginal tax rate, while half of your capital gains are taxed at your marginal tax rate. If you hold REITs inside tax-advantaged accounts like a Tax-Free Savings Account, Registered Retirement Savings Plan, Registered Disability Savings Plan, or Registered Education Savings Plan, then you can sidestep the above complexity. When unsure of where best to hold REIT units, seek advice from a tax professional.

Investors might be attracted to NorthWest Healthcare Properties REIT or SmartCentres REIT yields of over 7.2%. However, beware of their slow per-unit cash flow growth.

Business income

Business income can also become passive. You can develop a working business model and shift tasks to be automated (using robots) or passed on to be done by someone else such as employees or contractors. This method of making passive income likely requires greater initial work than the other two methods.

Investor takeaways

Often, you’ll find that passive income requires active work (at least initially). For instance, even when building a dividend stock portfolio, it requires you to learn how to pick stocks wisely instead of choosing dividend stocks that might cut their dividends. However, once you get the get the knack of it and get the passive-income stream(s) going, the rewards of wealth creation can be lasting with the help of compound interest.

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 Kay Ng has no positions in any of the stocks mentioned. The Motley Fool recommends Fortis, NorthWest Healthcare Properties Real Estate Investment Trust, and SmartCentres Real Estate Investment Trust. The Motley Fool has a disclosure policy.

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