The TSX has attractive stocks that give quarterly or monthly payouts through dividends and distributions if you are looking to earn passive income. These payouts are per share. If a $100 share gives you a $5 dividend/share annually, your dividend yield is 5%. To earn $5,000 in passive income, you will have to buy 1,000 shares of that stock.
While this calculation might look easy, it can put you at risk. The first rule of investing is diversification. Never put all your money in one stock because companies grow and dissolve. Business is dynamic, and you have to move with the times to keep your investments alive.
While you still need 1,000 shares of companies that pay at least a 5% dividend yield, you can buy 200 or 300 shares of three to five companies. While selecting the companies, make sure each is from a different sector. Also, ensure you have a different reason to be bullish on each of them.
How to select stocks for your dividend portfolio
If I were to build a passive income portfolio, I would invest in telecom, energy, real estate, banks, and utilities. These sectors are uncorrelated. For instance, energy and utilities are resilient to macro events and face no competition. Notably, the rates they charge consumers are regulated. Moreover, their profits are influenced by oil prices.
Telecom enjoys the benefits of a utility without having the limitation of a regulated rate. But these companies do compete with other broadband providers. Whereas banks and real estate stocks are directly impacted by the macroeconomic environment.
Building a portfolio for a legit shot at $5,000 in annual passive income
To earn $5,000 in annual passive income, you need a mix of stocks that gives at least a 5% dividend yield. And if the stock grows its dividend annually, you could achieve your targeted passive income faster.
BCE (TSX: BCE) is a large-cap telecom stock with a 6% dividend yield. The telco grows dividends at a compounded annual growth rate (CAGR) of 5%. To start earning $5,000 in annual passive income from next year onwards, you will need to buy 3,123 BCE shares, which will cost you over $200,000.
But if you systematically invest $6,000 annually in BCE shares, you can accumulate $5,000 in annual passive income after 10 years. As the company grows its dividends by 5%, you will only need 807 shares to achieve your goal. Instead of investing $200,000 right now, you invest $60,000 over 10 years to get a $5,000 passive annual income. Here’s how.
I assume BCE’s share price will grow by 3% every year.
| Year | BCE share price | Contribution | No. of shares purchased | Total shares | Dividend per share | Dividend income |
| 2023 | $65.0 | $6,000.0 | 92.00 | $3.870 | $356.04 | |
| 2024 | $67.0 | $6,000.0 | 89.00 | 181.0 | $4.064 | $735.49 |
| 2025 | $69.0 | $6,000.0 | 87.00 | 268.0 | $4.267 | $1,143.47 |
| 2026 | $71.0 | $6,000.0 | 84.00 | 352.0 | $4.480 | $1,576.96 |
| 2027 | $73.2 | $6,000.0 | 82.00 | 434.0 | $4.704 | $2,041.54 |
| 2028 | $75.4 | $6,000.0 | 79.00 | 513.0 | $4.939 | $2,533.81 |
| 2029 | $77.6 | $6,000.0 | 77.00 | 590.0 | $5.186 | $3,059.84 |
| 2030 | $79.9 | $6,000.0 | 75.00 | 665.0 | $5.445 | $3,621.24 |
| 2031 | $82.3 | $6,000.0 | 72.00 | 737.0 | $5.718 | $4,213.98 |
| 2032 | $84.8 | $6,000.0 | 70.00 | 807.0 | $6.004 | $4,844.94 |
| 2033 | $6.304 | $5,087.18 |
How to build your passive income investment model
The above table is an estimate, which could work if you buy BCE shares at the assumed stock prices and the telco keeps increasing its dividend by 5%. You can make a similar table for three to five passive income stocks and determine a portfolio mix depending on your return expectations.
This table will help you plan your initial investment. But you have to keep altering the table to reflect the actual numbers. For instance, if one of your stocks halves its dividend, you can reduce the dividend amount to analyze the impact on your portfolio. Accordingly, you can invest in another stock and get back on track for a $5,000 passive income.
If the stock price dips significantly, as it did during the March 2020 crash or October 2022 market downturn, you can buy more stocks and lock in a higher yield. The table will help you realize opportunities and grab them before it is too late.
