It may come as a surprise to some Canadians, but the sooner you start investing, the less you would need to make more than $10,000 a year in passive income. This is because, technically, $1 today is worth more than $1 tomorrow because of the general trend of inflation. So, the idea is to put your money to work for you by investing your excess capital as soon as possible.
That said, timing the market a bit and being selective about your investments will hopefully lead you to make above-average returns or passive income. After all, by timing the market and aiming to buy undervalued stocks that pay solid dividends, you would be able to make more passive income on your invested capital.
Compound interest would then aid you in building generational wealth in time.
How much do you need to invest to make $10,000/year?
The short answer is it depends. It depends on how much you’re investing today and what dividend yield you’re getting. If you aren’t able to earn $10,000 in passive income today, the dividend-growth rate you get and how much you’re able to continue to save and invest over time also comes into the equation. Here’s an example to improve clarity.
I don’t recommend putting all your eggs in one basket, but for illustration purposes, let’s say you put all your money in BCE (TSX:BCE) for a dividend yield of 6%. Many analysts believe the big Canadian telecom’s dividend is safe.
BCE stock also has a solid dividend payment history to prove management’s support of its dividend. For reference, its 20-year dividend-growth rate is 5.8%, which roughly aligns with its last dividend hike of 5.2%.
To earn $10,000 passive income from the dividend stock today, you would need to invest approximately $166,667. However, if you had invested in the blue-chip stock in 2006, you would only needed have invested about $71,942 then to earn $10,000 of passive income from BCE stock today, because you would be sitting on a yield on cost of about 13.9% after its many years of dividend growth.
If you’re only able to invest, say, $1,000 today and $200 every week (for $10,400 of investments a year) on a 6% initial dividend yield and 5% healthy dividend-growth rate thereafter, it would take just under 10 years for you to earn $10,000 of passive income annually, assuming a portfolio dividend yield of 6% at the end of the period and the income you earn along the way is also reinvested for a 6% initial dividend yield and sustainable 5% dividend-growth rate.
Investor takeaway
It requires planning and discipline to get a passive-income stream or even river going. Start saving and investing regularly as soon as possible to target an initial passive income of $10,000 from a diversified basket of solid dividend stocks. If you choose dividend stocks that increase their dividends over time, it’s only a matter of time before the passive income grows to $20,000, $30,000, etc…
Investors are lucky today. Currently, selective dividend-growth stocks, such as Enbridge and CIBC, which pay out safe dividends, offer dividend yields of about 6%. You should also consider populating your portfolio with stocks that have lower dividend yields but likely higher dividend-growth potential.
