The stock market is dynamic. There are no guaranteed returns. But then stocks are also a place where you can earn inflation-beating returns. How can you be sure you are on track to meet your financial goal? To help you solve this puzzle, I bring you a table that can help you track your portfolio value. It can tell you how much you should invest and for how long to get the desired annual passive income.
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How much to invest for $3,000 passive income every year
There is no one-size-fits-all answer. It depends on your budget, investment horizon, and stock performance. The TSX has Dividend Aristocrats that can give you an average dividend yield of 5-6% and growth stocks that can give you 10% average annual growth. It is a conservative estimate, as many tech stocks even give 20-30% average return.
To earn $3,000 in annual passive income, you need a $50,000 portfolio ($50,000 x 6%) that generates a 6% average annual dividend yield. If you have $50,000, you can invest it in Tax-Free Savings Account (TFSA) and get your $3,000 passive income next year. But that won’t be a tax-efficient solution, as your $50,000 TFSA contribution is taxable.
You can start with growth stocks to increase your investment portfolio and then transition to dividend stocks.
Preparing an investment table for expected returns
If you invest $300/month, your invested amount would be $2,400 at the end of each year. Invest this money in a pool of growth stocks that can deliver a 10% compound annual growth rate (CAGR). If things go as planned, your TFSA portfolio could be worth over $51,000 at the end of the 12th year.
| Year | Investment | Compounded Return @ 10% | Amount Accumulated |
| 2023 | $2,400 | $2,400.0 | |
| 2024 | $2,400 | $240.0 | $5,040.0 |
| 2025 | $2,400 | $504.0 | $7,944.0 |
| 2026 | $2,400 | $794.4 | $11,138.4 |
| 2027 | $2,400 | $1,113.8 | $14,652.2 |
| 2028 | $2,400 | $1,465.2 | $18,517.5 |
| 2029 | $2,400 | $1,851.7 | $22,769.2 |
| 2030 | $2,400 | $2,276.9 | $27,446.1 |
| 2031 | $2,400 | $2,744.6 | $32,590.7 |
| 2032 | $2,400 | $3,259.1 | $38,249.8 |
| 2033 | $2,400 | $3,825.0 | $44,474.8 |
| 2034 | $2,400 | $4,447.5 | $51,322.3 |
Let’s break down the table. (The table excludes commission and fees for buying stocks.)
At the end of 2023, your investment is $2,400. In 2024, your TFSA portfolio generates a 10% tax-free return of $240. In that year, you contribute another $2,400. By the end of 2024, your TFSA portfolio would have accumulated $5,040 (two instalments of $2,400 + $240 investment return). As you reinvest this return, you will earn a 10% compounded return of $504 on $5,040 in 2025.
You can drag the formula till you achieve your desired portfolio value. I stopped at 2034, as my desired outcome was $50,000.
Once you have reached your desired portfolio value, you can sell your growth stocks and invest them tax-free in dividend stocks like Enbridge, with a 6% average dividend yield. During this transition, wait for the right moment to buy dividend stocks. The stock price determines your dividend yield (annual dividend per share/stock price).
Tracking your TFSA portfolio performance
The stock market returns are dynamic. Some years, your portfolio might grow 30-50% or fall 20-30%. These fluctuations are normal. In the above table, you can add one more column at the right and write the actual value of your TFSA portfolio at the end of each year. The difference between estimated and actual can help you plan your investments accordingly. You can revise the investment returns and amount, extend your investment term, or choose different stocks.
Invest in this stock to put your investment plan into action
Descartes Systems (TSX: DSG) is a resilient growth stock that generated a 25% CAGR in the last 10 years. Stock price reflects future earnings potential. Descartes’s earnings grow steadily in the mid-teens. Its supply chain management solutions are in demand in every situation: e.g., Brexit, the United States-China trade war, the e-commerce boom, the pandemic, and the Russia-Ukraine war — every event has posed a challenge to domestic and global trade. Companies used Descartes’s solutions to resolve their logistics and supply chain issues.
Descartes stock has the potential to grow your money at a 10% CAGR in the next 10 years.
