How I’d Invest $500 a Month to Target a $5,938.68 Yearly Passive Income

The TSX has dropped by 8.1% in three months, and bears are still in the market in October. However, the stock market will eventually recover and rally again — if history repeats itself. The Canadian stock market has historically risen from its worst drops to print new all-time highs. This time could be no different.

Whatever the trading conditions in the market may look like, individuals should remain committed to their financial plans, including retirement savings plans. That said, it is easier to hold onto a position that is underwater if it pays you to keep holding it. For this reason, investors should design investment portfolios that generate passive income streams, even during market downturns.

Here’s how I’d use a dollar-cost-averaging strategy to design a portfolio that can pay $5,938.68 in annual passive income, with regular monthly contributions of $500 each.

General dividend investment plan for $500 monthly savings

I’d aim to religiously save and invest $500 every month into high-quality dividend stocks with well-covered payouts, strong balance sheets, businesses with tangible moats, and proven recurring cash flow generating capacity. Such stocks usually rebound when the good times roll again. They may grow their regular dividend payouts, making investors richer and happier in the process.

A bearish stock market is a somewhat dark cloud with a silver lining — it gifts investors with cheap investment opportunities on blue-chip dividend stocks that pay an all-weather passive income.

Valuations on Canadian real estate investment trusts (REITs) have fallen far too low since 2022. Yields on REIT distributions have risen to juicy levels. I might just lock in some of the hefty passive-income distributions.

Buy this high-quality Canadian REIT for its 6.9% yield

Down 18% in three months, CT Real Estate Investment Trust (TSX:CRT.UN) units trade cheaper today. The REIT is the landlord to retail giant Canadian Tire, a formidable cash flow-generating business that’s slowly expanding across Canada. The REIT boasts near full occupancy on its properties and a steady operating income growth pipeline, as its key tenant expands its footprint.

The trust grew its net operating income by 5.1% during the first half of 2023. It maintains an investment-grade credit rating, which implies a strong balance sheet. However, CT REIT’s units have not been spared in an asset-class-wide REIT plunge since 2022, and its monthly distributions yield 6.9% today.

CT REIT pays a well-covered distribution. During the first half of 2023, its payouts comprised 72.5% of its most recurring distributable cash flow, as measured by adjusted funds from operations (AFFO). The trust’s distributions seem safe from immediate cuts in the near term — just as it has been over the past decade. What’s more, CT REIT has a decade-long tradition of raising its distributions every year.

At the current unit price of around $12.87, a $500 investment in the trust’s units today could generate $35 in annual passive income. If we make the simplistic assumption that unit prices will stay near current levels for a year, 12 monthly investments of $500 each could grow to a $6,000 position that generates $420 in yearly passive income in the second year.

REIT distributions are taxable at your marginal income tax rates in Canada. I’d stash units in a registered Tax-Free Savings Account (TFSA) to avoid recurring income taxes.

How to generate $5,938.68 in annual dividends from $500 monthly investments

Extending the simplistic example above, $500 in monthly investments in a dividend stock paying a 6.9% dividend yield, done repeated over a decade (a period of 120 months), with full dividend reinvestment, could grow into a $86,067.78 portfolio that pays $5,938.68 in annual passive income in the 11th year.

Most noteworthy, future dividend raises (cuts) could amplify (reduce) the account’s total balance growth rate and increase (decrease) the payout in year 11. Take note that stock prices are “guaranteed” to keep changing every day, and the final results won’t exactly match our math above. However, I’d trust the process.

Small monthly investments, made regularly and religiously over decades, can grow into sizeable retirement portfolios. Keep investing diligently and aim to diversify holdings across individual stocks and asset classes.