Canadian investors continue to be the most interested in investing in dividend stocks on the TSX today. It’s clear why, with the TSX down 10% since 52-week highs, slumping below the $20,000 mark. Yet wanting to invest in dividend stocks and having the money for a passive-income portfolio are two very different things.
That’s why today I’m going to focus on creating a passive-income portfolio with just $5,000. If you’ve been continuing to save for the right opportunity, amassing savings with no where to put it, this should be a reasonable amount.
Even better, if you buy and hold for decades, then this amount could certainly create riches over the long haul — all while simply reinvesting dividends.
Choosing the right investment
The reason I’m focusing on $5,000 is so that investors can continue to invest elsewhere. I recommend that you meet with your financial advisor, who can help you create a strategy for retirement — one that involves conservative stocks, exchange-traded funds, bonds and more.
This $5,000, however, can certainly go a long way with the right investment. For me, one of the best investments come down to financial institutions. These institutions tend to drop during economic downturns, such as what we’re going through now. However, they then pop back up within a year.
If you’re seeking passive income then, I would consider Canadian Imperial Bank of Commerce (TSX:CM). It offers a substantial dividend yield at 6.28%. However, shares are down 18% in the last year, but they’re already up 3.5% year to date. So, there’s already some stability there.
That’s despite seeing earnings drop, which is par for the course during this period for a Canadian-focused bank. However, as mentioned, banks like CIBC stock tend to recover after downturns. In this case, CIBC stock recovered from the Great Recession within one year of hitting rock bottom and surged back to pre-fall highs.
What $5,000 can get you
Let’s say you’re going to take that $5,000 and invest in CIBC stock today. All we have to do then is look at the compound annual growth rate (CAGR) for shares and dividends. We’ll then imagine that the first year you invest, shares return to 52-week highs.
In this case, shares would climb about 27% the first year. After that, it would receive a CAGR of 3.95% in shares and 6.1% for the dividend. Let’s see what would happen if you were to reinvest only the dividend for the next 20 years.
| Year | Share Price | Shares Owned | Annual Dividend Per Share | Annual Dividend | After DRIP Value | Year End Stock Price | New Shares Purchased | Year End Shares Owned | New Balance |
| 1 | $57 | 88 | $3.48 | $306.24 | $5,278.24 | $71.76 | 4.27 | 92.27 | $5,584.63 |
| 2 | $71.76 | 92.27 | $3.69 | $340.69 | $6,961.52 | $74.59 | 4.57 | 96.84 | $7,302.39 |
| 3 | $74.59 | 96.84 | $3.92 | $379.37 | $7,602.60 | $77.54 | 4.89 | 101.73 | $7,981.75 |
| 4 | $77.54 | 101.73 | $4.16 | $422.84 | $8,310.54 | $80.60 | 5.25 | 106.98 | $8,733.68 |
| 5 | $80.60 | 106.98 | $4.41 | $471.78 | $9,094.19 | $83.78 | 5.63 | 112.61 | $9,565.88 |
| 6 | $83.78 | 112.61 | $4.58 | $516.23 | $9,950.91 | $87.09 | 5.93 | 118.54 | $10,467.36 |
| 7 | $87.09 | 118.54 | $4.86 | $576.56 | $10,900.36 | $90.53 | 6.37 | 124.91 | $11,477.05 |
| 8 | $90.53 | 124.91 | $5.16 | $644.60 | $11,952.88 | $94.11 | 6.85 | 131.76 | $12,597.51 |
| 9 | $94.11 | 131.76 | $5.48 | $721.43 | $13,121.02 | $97.82 | 7.37 | 139.13 | $13,841.99 |
| 10 | $97.82 | 139.13 | $5.81 | $808.25 | $14,418.59 | $101.69 | 7.95 | 147.08 | $15,227.02 |
| 11 | $101.69 | 147.08 | $6.16 | $906.56 | $15,862.93 | $107.89 | 8.4 | 155.48 | $16,769.22 |
| 12 | $107.89 | 155.48 | $6.54 | $1,016.79 | $17,791.79 | $112.15 | 9.07 | 164.55 | $18,809.02 |
| 13 | $112.15 | 164.55 | $6.94 | $1,141.75 | $19,596.59 | $116.58 | 9.79 | 174.34 | $20,737.95 |
| 14 | $116.58 | 174.34 | $7.36 | $1,283.47 | $21,608.63 | $121.19 | 10.59 | 184.93 | $22,892.02 |
| 15 | $121.19 | 184.93 | $7.81 | $1,444.48 | $23,855.87 | $125.98 | 11.47 | 196.4 | $25,300.81 |
| 16 | $125.98 | 196.4 | $8.29 | $1,627.65 | $26,369.23 | $130.95 | 12.43 | 208.83 | $27,996.96 |
| 17 | $130.95 | 208.83 | $8.79 | $1,836.23 | $29,182.83 | $136.12 | 13.49 | 222.32 | $31,019.15 |
| 18 | $136.12 | 222.32 | $9.33 | $2,074.09 | $32,337.20 | $141.50 | 14.66 | 236.98 | $34,411.60 |
| 19 | $141.50 | 236.98 | $9.90 | $2,345.72 | $35,878.63 | $147.09 | 15.95 | 252.93 | $38,224.72 |
| 20 | $147.09 | 252.93 | $10.50 | $2,656.32 | $39,859.87 | $152.90 | 17.37 | 270.3 | $42,515.74 |
Now, by the end of 20 years, you’ll have turned that original $5,000 into $42,515.74 from just a $5,000 investment! Furthermore, at that point, you’ll look forward to $2,656.32 in annual passive income.
