Wouldn’t it be nice if you had two fewer things to worry about every month? So, your mortgage payments are increasing as your fixed-interest contract renews with a higher interest rate. Canada has not had a 4.5% interest rate since 2007. Accommodating utility bills and groceries with a higher mortgage leaves you with little money for discretionary spending. At times like these, you feel a $300–$500 monthly passive income would make life easy. Don’t let this thought be in vain. The struggles of today are the comforts of tomorrow.
How to convert a $500 investment into a $500 passive income
If you invest $500/month in stocks that offer more than a 5% dividend yield and reinvest the dividend, you can earn $500 in monthly passive income in 16 years. Here’s how.
| Year | Contribution | Dividends @5% | Total Amount |
| 2023 | $6,000.0 | $6,000.0 | |
| 2024 | $6,000.0 | $300.0 | $12,300.0 |
| 2025 | $6,000.0 | $615.0 | $18,915.0 |
| 2026 | $6,000.0 | $945.8 | $25,860.8 |
| 2027 | $6,000.0 | $1,293.0 | $33,153.8 |
| 2028 | $6,000.0 | $1,657.7 | $40,811.5 |
| 2029 | $6,000.0 | $2,040.6 | $48,852.1 |
| 2030 | $6,000.0 | $2,442.6 | $57,294.7 |
| 2031 | $6,000.0 | $2,864.7 | $66,159.4 |
| 2032 | $6,000.0 | $3,308.0 | $75,467.4 |
| 2033 | $6,000.0 | $3,773.4 | $85,240.7 |
| 2034 | $6,000.0 | $4,262.0 | $95,502.8 |
| 2035 | $6,000.0 | $4,775.1 | $106,277.9 |
| 2036 | $6,000.0 | $5,313.9 | $117,591.8 |
| 2037 | $5,879.6 | $123,471.4 | |
| 2038 | $6,173.6 |
A $500 monthly investment converts to a $6,000 annual income. You will receive the first full-year 5% dividend of $300 on your 2023 investment in 2024. Next year, you will invest another $6,000 plus reinvest the $300 dividend income, bringing your total investment to $12,300. After 14 years of repeating this, you will accumulate a portfolio of $117,592, of which your invested amount is $84,000.
This dividend reinvestment adds $39,500 to your portfolio in 16 years. After 16 years, you can decide to reinvest or start collecting your $500 in monthly passive income.
2 TSX stocks for your $500 monthly passive income goal
The first thing that comes to mind when you think of passive income is safe dividend aristocrats that have been paying dividends for decades. You probably even have a good amount invested in such stocks. But it is important to diversify your portfolio across some mid- and small-cap stocks. They are risky and relatively new. But they have the potential to grow dividends and their stock price, enhancing your portfolio value in the long term.
For April 2023, you can lock in a 5% annual dividend yield with these two mid-cap stocks.
RioCan REIT
The rising interest rate has pulled down property prices, sending real estate stocks on a downtrend. Some commercial REITs even slashed their distributions to keep up with falling occupancy rates. These challenging times have pulled down RioCan REIT’s (TSX: REI.UN) stock price by 17% since the rate hike began and inflated the distribution yield to 5.06%. While many retail REITs offer a higher yield, I choose RioCan because its 2020 distribution cuts reduced its payout ratio to a safe zone of 59%. Other REITs have a payout ratio above 70%.
Moreover, RioCan can withstand a significant dip in property prices as most of its properties are based in the top six densely populated cities that have a higher average household income. It has three things working in its favour: prime location, high credit ranking tenant base, and lower payout ratio. If you invest in RioCan while it trades between $20.50 and $21.50, you can lock in a 5% annual yield distributed over 12 monthly instalments.
Rogers Sugar stock
Rogers Sugar (TSX: RSI) gives you a good option to diversify your dividend portfolio into the consumer staples sector, which is resilient to macroeconomic crises. The company enjoyed strong revenue last year due to operational issues at a competitor. But it did not grow dividends as it did not expect the growth to sustain. Favourably, higher sugar prices offset increased expenses due to inflation. If you buy this stock between $5.50 and $6.50, you can lock in a 5.5% dividend yield.
Investing tip
A $3,000 investment can buy you 139 shares of RioCan at $21.50/share in 2023 and earn you $141.60 in annual passive income in 2024. A similar investment can buy 461 shares of Rogers Sugar at $6.50/share and give $166 in annual passive income. Together, they can earn you $307 in passive income in 2024.
