I’ve been hammering into investors lately that there is more to passive income than dividends. And it’s true! Passive income is the income you make while you’re doing anything else besides investing. Sleeping? Yes. Eating? Yes. Meming on the toilet? Yup, that too.
That’s why it’s important to consider stocks for more than just dividend income. Passive income can come from monthly dividends, true. But it also comes from returns, which can arguably be far higher.
Today, let’s look at how to create true passive income — some that the Canada Revenue Agency (CRA) cannot touch.
Get yourself a TFSA
If you don’t already have a Tax-Free Savings Account (TFSA), I’m hoping you’re under 18 and can’t legally. Otherwise, what are you doing? This is the best way to create passive income not just for this year but even in your retirement.
The TFSA provides a way to create income that cannot be taxed by the CRA (hence the “tax-free” part). But the other benefit is that there are very few limitations on the account. Right now, you can invest up to $88,000 to reach the contribution limit if you started in 2009 and haven’t contributed yet. From there, each year, more is added on, with 2024 seeing it hit $7,000 in additional room.
But I digress. There’s all that contribution room, where you can save for decades. But you can also take it out when needed. If you suddenly need a new roof, lose a job, or have an emergency you can simply take out the cash — all of it. No fees — no problem. So, grab a TFSA, like, right now.
Choose the right investments
The “right” investments mean those that are due for continued gains, with a history of performing strongly in the past. For that, I would look to blue-chip companies that have been around for decades. Not only do these companies have a history of growth behind them. They also have a history of collecting cash — cash that’s, in all likelihood, going to be used for dividends in some manner.
Yet even among blue-chip companies, it can be difficult. While Canadian banks are great, they don’t necessarily provide a great solution during a downturn. And if you need to take out your cash during an economic fall like this one, then you would be stuck.
That’s why it’s a good idea to think outside the box. For that, I’d actually lean towards this top stock.
Constellation stock
Constellation Software (TSX:CSU) has become a powerhouse of software acquisitions over the last two decades. The company has grown so much, in fact, that it’s had to create a spinoff company to address the growing need to acquire software companies in Europe! If that’s not success, I don’t know what is.
What’s more, shares of Constellation stock are up over 1,300% in the last decade alone. And while it might be a software company, I assure you, it’s anything but volatile. Constellation simply acquires companies, refurbishes them under their own names, and gives them top-notch management.
By doing this, it’s created a steady stream of cash flow and growth that’s remained even during this market volatility. Plus, it has a nice little 0.19% dividend yield to add on. So, now, let’s see what you could get from this stock should it surge to consensus estimates from an investment.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY | PORTFOLIO TOTAL |
| CSU – now | $2,891 | 7 | $5.43 | $38.01 | quarterly | $20,237 |
| CSU – estimates | $3,085 | 7 | $5.43 | $38.01 | quarterly | $21,595 |
In just a short period of time, you could have returns of $1,358 and dividends of $38.01. That’s total passive income of $1,396.01, which comes to $116.33 each month — and every cent is tax free.
