Passive Income: How I Got to $2,000/Year After Just 4 Years of Saving

I got to $2,000/year in passive income partially by buying bank stocks like Toronto-Dominion Bank (TSX:TD).

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Recently, I achieved my passive-income goal of $2,000 per year, which I set at the start of the year. I thought that it would take me longer to reach $2,000 per year, but I ended up crossing the finish line faster than anticipated. Overall, it took me four years of saving to get to $2,000 per year in annual passive income. It took fewer than six months from the time that I set the goal — at that point, I was already earning about $1,200 per year in passive income. In this article I will explore exactly how I got to $2,000 per year in passive income.

Step #1: Save diligently

The first thing I did to get to $2,000 per year in passive income was save diligently. Even before I set my passive-income goal at the start of this year, I had been saving and investing for three-and-a-half years.

What really took me across the finish line this year was buying Guaranteed Investment Certificates (GICs). As a result of the Bank of Canada’s interest rate hikes, GIC interest went as high as 5%. I went ahead and bought several of these 5%-yielding GICs, bringing my passive income to $2,000 relatively quickly.

Step #2: Invest conservatively

It wasn’t just GICs that kicked my passive income into high gear this year. I bought some dividend stocks as well. Among other things, I bought bank stocks, high-yield exchange-traded funds (ETFs), and even some dividend-paying technology stocks.

One stock I bought to increase my passive income was Toronto-Dominion Bank (TSX:TD). TD Bank is a high-yield stock with a 4.73% dividend yield. It has raised its dividend consistently over the last five years (apart from the COVID period, when the government banned bank dividend increases).

TD Bank stock is down this year, mainly because of the regional banking crisis that roiled U.S. banks this past spring. Several U.S. banks, like Silicon Valley Bank and First Republic, collapsed altogether, dragging the entire banking sector down with them. TD began recovering from this beating in the weeks after First Republic went down, but started falling again after a relatively weak showing from its peer banks when they released earnings last week.

Why do I like TD Bank stock, despite all of this?

First, it’s growing faster than average for Canadian banks, having grown its revenue by 7% and its earnings by 8.8% (per year) over the last five years. Second, it’s highly profitable, with a 30% profit margin. Third and finally, it’s geographically diversified, with over a third of its earnings coming from the U.S. market. It’s a pretty good business on the whole.

Step #3: Re-invest dividends

Once you’ve got your conservative stock portfolio in place, it’s time to watch those dividends roll in and then re-invest them. Personally, I don’t have automatic re-investment on my portfolio, but I always re-invest my dividends into something sooner or later. Whether you choose automatic re-investment or manual reinvestment, make sure you’re putting your dividends to work for you; by doing so, you enjoy the power of compounding.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Button has positions in Toronto-Dominion Bank. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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