There’s something quite remarkable that many Canadian investors I believe tend to forget. That’s the real definition of passive income.
Passive income is income that’s generated, well, passively. As in, no effort. And yet, dividends tend to get all the glory when considering passive income stocks.
In reality, returns deserve just as much interest. And it’s why today we’re going to consider that as a factor for investment as well.
What investors need
To get started, investors will need to have a place to create passive income. Of course, a wonderful option then is the Tax-Free Savings Account (TFSA). The TFSA is perfect because as long as you stay within the contribution limits, you can create as much passive income as you’re able! What’s more, should an emergency arise you can take out that cash at any time. All of it. Every penny, tax free.
Once you’re set up, it’s time to start budgeting. A budget will allow you to identify how much money you can afford to put in your TFSA on a regular basis. Yes, regular. Investors should seriously consider investments in a TFSA as bill payments and do it every month. Ideally, these should be automated contributions so you never have to worry about missing them.
Say you were to do $500 per month, that’s $6,000 invested in a year! After 20 years, even without investing that would turn into $120,000! But invest it, and you can create massive passive income.
Start considering stocks
Once you start investing in your TFSA, it’s important to note that you should never put all your eggs in one basket. Meet with your financial advisor, and regularly, to create goals and stick to them.
That being said, there are certainly a few stocks that you can start out with. For example, I would consider blue-chip companies. These are companies that have been around for decades, allowing investors to feel safe that the company has cash on hand to avoid a crash.
A solid choice these days are banking stocks. Canadian banks may fall, but they have a history of bouncing back to 52-week highs within one year of hitting 52-week lows. Yet above them all, I would look at Royal Bank of Canada (TSX:RY).
Stability and growth
Royal Bank stock is an excellent option as the bank is the largest of the Big Six Banks in terms of market cap and assets. Yet, the company hit 52-week lows recently, with shares down 11.23% in the last year, as of writing.
What’s more, Royal Bank stock offers value, as it’s trading at 10.5 times earnings. Finally, it of course has a dividend as well. That dividend yield sits at 4.89%. This is far greater than the five-year average yield of 3.88%. So you’re getting a bargain, and a bigger dividend.
This is exactly what you want when looking for future passive income. So let’s say you take $6,000 and put it towards Royal Bank stock today. It then reaches 52-week highs once more. Here is what that could look like.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY | PORTFOLIO TOTAL |
| RY – lows | $108 | 56 | $5.40 | $302.40 | quarterly | $6,000 |
| RY – highs | $140 | 56 | $5.40 | $302.40 | quarterly | $7,840 |
Once reached, you’ll have an extra $1,840 in returns and $302.40 in dividend income. That’s total passive income of $2,142.40! That creates monthly income of $178.53! So don’t wait for shares to rebound. Find your goals, stick to them, and invest in your TFSA today.
