Are you looking to generate a passive source of income through stock investing? You have determined that you will need an amount of $500 in monthly passive income to take care of utility and other expenses. To start earning $500/month in 2023, you will need 1,540 shares of BCE (TSX: BCE) today. And if you go to buy that many shares at the current trading price, you will have to shell out $94,000.
Investing $94,000 for $500/month for a long time might look like a crazy idea because it is. Building an alternate income needs time, and inflation will increase your daily expenses.
How to calculate your monthly passive income requirement?
Statistics Canada releases the Consumer Price Index, which tells you the inflation-adjusted value of money. For instance, what you could buy with $500 in January 2013 would require $634 today. Thus, it is better to aim for a higher amount to maintain a similar standard of living.
Keeping this in mind, I identified a passive income amount of $1,000/month that you can start earning in 14 years. Your dividend income could keep growing along with inflation, and so will your invested amount.
Pre-requisites for building a $1,000 monthly passive income portfolio
Before we get crunching numbers, remember that these calculations have assumptions that may not hold for a 14-year-long period. And you are investing through a registered account that allows you to grow your investment tax-free.
To build a $1,000 monthly income portfolio using the below calculation:
- The stock should have an average dividend yield of 5.5%
- The stock should grow its dividend at a compounded annual growth rate (CAGR) of 5%.
BCE has a five-year average dividend yield of 5.5% and has been growing dividends per share at a 5% CAGR for 11 years. Its accelerated capital spending to deploy 5G infrastructure could bring incremental cash flows and help it grow dividends at a similar rate for another five years and beyond.
It is difficult to predict the 14-year cash flow for a company. If BCE’s dividend CAGR or yield slows, you may look for another stock that fits the bill. You will have to keep adjusting the table depending on the stock market.
Invest $500/month today to get $1,000/month after 14 years
| Year | BCE Share price (4% CAGR) | Total Investment | New shares | Total shares | Dividend per share (5% CAGR) | Dividend income |
| 2023 | $63.0 | $6,000.0 | 95.2 | $3.9 | $368.57 | |
| 2024 | $65.5 | $6,368.6 | 97.2 | 192.4 | $4.1 | $781.97 |
| 2025 | $68.1 | $6,782.0 | 99.5 | 292.0 | $4.3 | $1,245.73 |
| 2026 | $70.9 | $7,245.7 | 102.2 | 394.2 | $4.5 | $1,766.07 |
| 2027 | $73.7 | $7,766.1 | 105.4 | 499.6 | $4.7 | $2,350.05 |
| 2028 | $76.6 | $8,350.1 | 108.9 | 608.5 | $4.9 | $3,005.62 |
| 2029 | $79.7 | $9,005.6 | 113.0 | 721.5 | $5.2 | $3,741.80 |
| 2030 | $82.9 | $9,741.8 | 117.5 | 839.0 | $5.4 | $4,568.78 |
| 2031 | $86.2 | $10,568.8 | 122.6 | 961.6 | $5.7 | $5,498.09 |
| 2032 | $89.7 | $11,498.1 | 128.2 | 1089.8 | $6.0 | $6,542.84 |
| 2333 | $93.3 | $12,542.8 | 134.5 | 1224.3 | $6.3 | $7,717.84 |
| 2034 | $97.0 | $13,717.8 | 141.4 | 1365.8 | $6.6 | $9,039.94 |
| 2035 | $100.9 | $15,039.9 | 149.1 | 1514.9 | $6.9 | $10,528.24 |
| 2036 | $104.9 | $16,528.2 | 157.6 | 1672.4 | $7.3 | $12,204.46 |
Let’s understand the table in detail.
In January, you started investing $500/month in BCE. Assuming its stock price grows at a CAGR of 4%, your investment of $6,000 would buy you 95.2 shares of BCE by year-end. These shares will earn you an annual dividend income of $368.6 ($95.2 x $3.9) in 2024.
Next year, you invest another $6,000 plus your $368 dividend income, bringing your total investment in 2024 to $6,368. This amount will buy you 97.2 shares of BCE at an average price of $65.5. Your current shares plus last year’s shares add up to 192.4 shares. Assuming BCE grows its dividend by 5%, a $4.1 dividend per share will earn you $781.9 in annual passive income.
Invest, reinvest, repeat and in 14 years, you will earn $12,200 in annual passive income, which converts to $1,017 in monthly passive income.
Summing up
You invest $84,000 over 14 years ($6,000 x 14), and dividend reinvestment adds $57,155 to your contribution. At the end of 2036, you own 1,672 shares of BCE, and your portfolio’s value could be above $175,400 (assuming the stock price grows to $105) over and above your passive income.
