You don’t need to start with a lot of capital to build an attractive stream of passive income. In fact, with as little as $5,000, you could eventually earn $140 every month.
While that number sounds impossible, it isn’t. Let’s say you start with $5,000, and you invest in a mix of dividend stocks that have an average dividend yield of 5%. You would end the year with around $250 total from dividends.
Rather than spending that $250, you could re-invest it back into your pool of stocks. In the next year, you would have $5,250 potentially earning a 5% dividend yield. That next year yield would equal $262.50 (up $12.50) of passive income.
You re-invest that new sum, and your income further grows. You can start to see the wonderful power of compound interest at work.
Grow your passive income with the principals of compound interest
If you continued to do this (and all factors like yield remain constant), you could be earning as much as $300 of passive income in five years, $387 in 10 years, $630 in 20 years, $1,029 in 30 years, and $1,676 in 40 years!
In 40 years, you could average just under $140 of monthly passive income. That is a 32% passive-income yield on your initial $5,000 investment!
While this is a very simplistic way to think about investing, it demonstrates the powerful combination of compound interest and time. Start early, save often, re-invest your earnings, and you can do very, very well.
If you are looking to start now with $5,000, the two large-cap dividend stocks that look attractive for compounding passive income are Brookfield Infrastructure Partners (TSX:BIP.UN) and TELUS Corp. (TSX:T).
Brookfield Infrastructure: A defensive stock for compounding passive income
Brookfield Infrastructure pays a 4.7% dividend yield today. This passive income stock is down 5.5% in the month and 18.6% in the past year. This stock is trading below its five- and 10-year average valuation on a price-to-adjusted funds flow basis, which suggests some attractive value.
The fact is, BIP offers both defence and offence for a portfolio. Over 90% of its assets are contracted or regulated. A large portion of earnings are indexed to inflation. Its assets are economically essential, predictable, and diversified.
BIP has compounded total returns at around 11% annually for the past 10 years. It is likely to keep this up, so investors have a good chance of doing better than the initial example.
TELUS: A safe and steady dividend stock
Like BIP, TELUS is a very defensive business for passive income. It is one of Canada’s largest telecommunications providers. Phones, data, and internet are just as important as water and electricity in today’s modern era. TELUS collects a wide array of its earnings from contracting telecom services out to businesses and individuals.
TELUS has differentiated itself by investing in several digital verticals. It is a dominant virtual health player in Canada, a leader in agriculture technology, and it operates a global digital customer experience business platform.
TELUS stock is down 16% over the past year. It is yielding over 5%, and it looks like a decent bargain. This stock has delivered a total annual average return of 7.8%. While not as attractive as BIP, TELUS is another defensive stock to consider for a passive-income-compounding portfolio.
