I’m going to do something a little bit different here today. Usually when we discuss passive income, we talk about dividends. This is fixed income that companies pay investors every year, quarter, or even every month. And that’s definitely a stable way to look at returns.
However, passive income can also come from dividend stocks through the actual returns on the shares over time. That’s why you’re buying them in the first place, is it not?
So today, let’s look at how we can make a particularly strong amount of passive income each month, taking into consideration both dividends and returns.
When do you need it by?
The first question you need to ask yourself is when you want to have this passive income available to you? Because sure, you could make a massive investment and start creating passive income each month. Or, you could reinvest a smaller amount over time.
Today, to keep things simple, we’re going to look at investing perhaps a bit larger sum. Now, I’ve written many other articles that show you how to invest just $5,000, for example, and reinvest your funds over time. But today, we’re going to go with a higher number.
That number is still going to be safe, taking up about 10% of your income for the year. That’s a comfortable amount you should set aside annually for investment. Furthermore, this shouldn’t happen every year towards one stock. You should create a well-diversified portfolio with the help of your financial advisor.
But today, we’re going to focus on this one stock. And if you make $85,000 per year, that would mean investing $8,500 this year alone.
Now for the stock choice
If you’re going to be putting 10% of your income aside, it better be in a strong dividend stock. But you also want monthly income in the form of dividends and returns. So this definitely tightens the noose around your options a little bit.
In this case, I would stick with companies you know will come back after the current downturn. To know this, you need to look to the past. I like recommending companies that have a history of rebounding from past recessions. Or, those that are in essential services.
Today, that stock is going to be First National Financial (TSX:FN). First National stock is a solid choice, as it came on the scene during the Great Recession, and has been climbing upwards since. It deals mainly with mortgages, which is also why it’s not doing so great right now.
Even so, look to the past and you’ll see the company has a history of coming back strong. What’s more, it offers a monthly dividend, currently with a yield at 6.42%. All while trading at 11.5 times earnings.
Creating monthly income
So you have $8,500 to invest in First National stock. What you want to consider then is the last year, along with previous years for the potential for share growth. You also need to consider how the dividend yield could grow.
This time, we’re only going to look at the next year. We’re going to let your investment grow and grow for just a year, then start looking at what returns could look like each month after that. Then, you can start taking out just the returns. Keep your main investment there, so it can continue to climb.
Here is what that might look like a year from now based on today’s performance. First National stock currently has a compound annual growth rate (CAGR) of 7.76% in the last decade. It’s also down by 7.5% in the last year. We could therefore see growth of 14% in the next year to make up for the downturn. As for its dividend, it has a CAGR of 6.4% in the last 10 years.
|COMPANY||RECENT PRICE||NUMBER OF SHARES||DIVIDEND||TOTAL PAYOUT||FREQUENCY||TOTAL PORTFOLIO|
|FN – now||$37.25||228||$2.40||$547.20||monthly||$8,500|
|FN – one-year later||$42.50||228||$2.55||$581.40||monthly||$10,271.40|
With dividends included, you could have total returns of $1,771.40 in just a year. And these are conservative numbers as well. Those returns divided up would then bring in $147.61 each and every month over the next year!