Young investors may not believe that investing a bit at a time can lead to something as grand as early retirement. Invest in high-quality, safe stocks over decades. Today, I’m going to show you how to achieve a large amount of passive income, even with a small investment.
How much can you afford?
First, young investors should figure out how much they can afford. Do not stretch yourself too thin and create debt just to invest. That’s absolutely not the point of investing. Instead, budget. Create a budget and update it every three months as your life changes. Then identify how much you can afford to put aside in an investment account and do it each and every paycheque.
Let’s see an example. The average Canadian between 25 and 34 currently makes $53,500 as of 2021, according to Statistics Canada. Let’s say of that, you can afford to put aside 7% of your income each year.
I would therefore recommend doing this each and every paycheque. If you’re making $53,500, that means you’re putting aside $3,745 each year, which comes to just $144 per paycheque. You can use this to drip feed into your investments over time, adding your dividend passive income.
A stock to choose
If you want your income to last, then you need a passive-income stock that will last. So, I would consider one that has a long history and a long growth outlook as well. A&W Revenue Royalties Income Fund (TSX:AW.UN) is actually a strong option in this case.
The company is considered safe, as it merely collects income from franchisees and rental revenue. It remains a stable stream of cash flow from this, rather than depending solely on sales. Currently, it holds a dividend yield at 5.19%, which comes out on a monthly basis. Shares are down 8.25% in the last year and trade at 17.67 times earnings as of writing.
To see how much you need to invest to create passive income for early retirement, we need to look at the compound annual growth rate (CAGR). For A&W stock, that comes to a dividend CAGR of 3% in the last decade and 5.33% for its share price.
Bottom line
Let’s put all this data in and see what an investor could make to retire early if they start at age 25, putting aside that $144 each and every paycheque. Then they reinvest the passive income and continue to add those funds time after time.
| Shares Owned | Annual Dividend Per Share | Annual Dividend | After DRIP Value | Year End Shares Owned | Year End Stock Price | New Balance |
|---|---|---|---|---|---|---|
| 101.00 | $1.93 | $194.47 | $3,946.27 | 201.93 | $39.08 | $7,890.99 |
| 201.93 | $1.98 | $400.48 | $8,300.92 | 302.88 | $41.16 | $12,466.51 |
| 302.88 | $2.04 | $618.70 | $13,099.48 | 403.86 | $43.35 | $17,508.95 |
| 403.86 | $2.10 | $849.73 | $18,377.84 | 504.90 | $45.66 | $23,056.07 |
| 504.90 | $2.17 | $1,094.19 | $24,174.37 | 606.01 | $48.10 | $29,148.26 |
| 606.01 | $2.23 | $1,352.71 | $30,530.12 | 707.20 | $50.66 | $35,828.72 |
| 707.20 | $2.30 | $1,625.96 | $37,488.93 | 808.50 | $53.36 | $43,143.60 |
| 808.50 | $2.37 | $1,914.61 | $45,097.64 | 909.89 | $56.21 | $51,142.19 |
| 909.89 | $2.44 | $2,219.36 | $53,406.23 | 1011.39 | $59.20 | $59,877.11 |
| 1011.39 | $2.51 | $2,540.94 | $62,468.06 | 1112.99 | $62.36 | $69,404.51 |
| 1112.99 | $2.59 | $2,880.09 | $72,340.02 | 1214.70 | $65.68 | $79,784.28 |
| 1214.70 | $2.67 | $3,237.59 | $83,082.76 | 1316.51 | $69.18 | $91,080.26 |
| 1316.51 | $2.75 | $3,614.21 | $94,760.93 | 1418.42 | $72.87 | $103,360.51 |
| 1418.42 | $2.83 | $4,010.78 | $107,443.40 | 1520.40 | $76.75 | $116,697.51 |
| 1520.40 | $2.91 | $4,428.14 | $121,203.48 | 1622.46 | $80.85 | $131,168.46 |
| 1622.46 | $3.00 | $4,867.14 | $136,119.23 | 1724.58 | $85.15 | $146,855.51 |
| 1724.58 | $3.09 | $5,328.68 | $152,273.71 | 1826.74 | $89.69 | $163,846.11 |
| 1826.74 | $3.18 | $5,813.68 | $169,755.27 | 1928.93 | $94.47 | $182,233.27 |
| 1928.93 | $3.28 | $6,323.06 | $188,657.87 | 2031.13 | $99.51 | $202,115.90 |
| 2031.13 | $3.38 | $6,857.81 | $209,081.37 | 2133.31 | $104.81 | $223,599.15 |
| 2133.31 | $3.48 | $7,418.91 | $231,131.93 | 2235.47 | $110.40 | $246,794.76 |
| 2235.47 | $3.58 | $8,007.39 | $254,922.31 | 2337.57 | $116.28 | $271,821.48 |
| 2337.57 | $3.69 | $8,624.31 | $280,572.31 | 2439.59 | $122.48 | $298,805.39 |
| 2439.59 | $3.80 | $9,270.73 | $308,209.10 | 2541.51 | $129.01 | $327,880.43 |
| 2541.51 | $3.91 | $9,947.78 | $337,967.71 | 2643.30 | $135.89 | $359,188.74 |
| 2643.30 | $4.03 | $10,656.60 | $369,991.45 | 2744.94 | $143.13 | $392,881.21 |
| 2744.94 | $4.15 | $11,398.36 | $404,432.36 | 2846.40 | $150.76 | $429,117.93 |
| 2846.40 | $4.28 | $12,174.27 | $441,451.75 | 2947.66 | $158.79 | $468,068.74 |
| 2947.66 | $4.41 | $12,985.57 | $481,220.70 | 3048.68 | $167.26 | $509,913.76 |
| 3048.68 | $4.54 | $13,833.53 | $523,920.61 | 3149.45 | $176.17 | $554,844.02 |
After 30 years, young investors could have almost $555,000 in their portfolio from using this method! So, consider investing in a safe passive-income stock like this one again and again today.
