Starting a passive income is easy. You simply have to find the right stocks and keep them in your TFSA to enjoy tax-free passive income. However, choosing the right stocks for passive income requires looking at more than yield. You must find the right combination of yield, sustainability, and performance.
If you buy a growth stock that also pays dividends, it may have a low yield, and you will have to invest more money to get the same amount of passive income as you would get from a high-yield stock that offers minimal capital growth opportunities. If the latter is more your cup of tea and you need to generate a passive income of about $60 a month, two stocks should be on your radar.
A holding company
Holding companies usually allow you to invest in a diverse set of businesses by buying just one stock, but Power Corporation of Canada (TSX:POW) is a bit different. Most of the businesses under the Power Corporation banner are insurance, retirement, and wealth management service related. But the company is expanding its portfolio and entering progressive market segments like FinTech through its subsidiaries.
The stock has been quite stable in the last decade and risen by about 19% in the past five years. But capital appreciation is not why most people seek this stock. Its dividends are the highlight of this investment. POW is an aristocrat that has grown its payouts for eight consecutive years, and the dividends are financially stable. The payout ratio hasn’t grown beyond 84% in the last 10 years.
The company is currently offering a juicy yield of about 6%. At this yield, you will need about $12,000 to generate a passive income of about $60 a month (on its own) and $6,000 to generate a $30 monthly passive income. It’s among the stable, large-cap stocks in Canada that offer sustainable and generous dividends, making it an ideal pick for long-term passive income generation.
SmartCentres REIT (TSX:SRU.UN) was originally a retail space giant that is now slowly focusing on mixed-use properties and entire communities. Its retail portfolio is still quite impressive, thanks mostly to Walmart, which is SmartCentres’ most prominent tenant and anchors a significant proportion of its properties.
This excellence is not apparent in the stock’s performance, which is, at best, capable of preserving your capital over the long term. In the last five years, the stock has actually fallen 9%, but it’s likely to perform better in a healthier market. The REIT makes up for what it lacks in capital appreciation potential in dividends.
It’s not a dividend aristocrat right now, but it did grow its payouts till 2019. The dividends are financially stable (for most years), and the yield is usually generous. Right now, the stock is offering its payouts at 7%. You would need a little over $10,000 to start generating a $60 per month income from this REIT alone. You can get about $32 monthly with just $5,500 invested in the REIT.
You will need to invest about $11,500 in the two stocks to generate a monthly income of about $60 from your TFSA. That’s less than 15% of a fully stocked TFSA in 2023. The $60 may not offset any major expenses, but a few streams like this can help you manage your expenses better, save more, and pursue a more aggressive wealth-building strategy.
Multiple passive income streams can also be part of more comprehensive retirement planning for many investors, regardless of how far they are from their retirement years.