Passive Income: How Much Should You Invest to Earn $5K in Annual Dividends

An alternative source of passive income can help investors accelerate their retirement plans and create game-changing wealth over time. However, to create passive income, you first need capital. Some passive-income investors either invest in fixed-income securities or purchase a home, which is then rented out to tenants to create an alternative income stream.

While fixed-income securities such as bonds provide stable returns, they have historically failed to outpace inflation. However, buying a house is capital intensive as you need around $650,000 on average to purchase a home in Canada. It means you need to rely on a mortgage to fund this purchase, which requires regular interest payments, lowering overall returns.

One low-cost way to create passive income is by investing in blue-chip dividend-growth stocks. Ideally, you invest in companies with a growing earnings base, fueling their dividend growth over time and enhancing the effective yield. Investors are also positioned to benefit from long-term capital gains by holding quality TSX dividend stocks such as Toronto-Dominion Bank (TSX: TD) and Brookfield Renewable Partners (TSX: BEP.UN).

Is TD stock a good buy right now?

Valued at $154 billion by market cap, TD Bank stock is a TSX giant and currently offers you a tasty dividend yield of 4.5%. It pays shareholders an annual dividend of $3.84 per share, and these payouts have grown by 10% annually in the last 27 years, showcasing the resiliency of its business model.

Canadian banks, including TD, are quite conservative, and this approach has allowed them to maintain dividend payouts across market cycles.

TD Bank completed the acquisition of Cowen in early 2023, advancing its capabilities in the Wholesale Banking segment. Cowen’s presence in the U.S. will also increase TD’s exposure to the world’s largest economy while enabling the addition of complementary products and services to the latter’s existing business. TD Bank paid around $2 billion for the Cowen acquisition, allowing it to expand its assets by almost $11 billion.

Priced at 10.2 times forward earnings, TD Bank stock is quite cheap and trades at a discount of 10% to consensus price target estimates.

Does Brookfield Renewable stock pay a dividend?

A clean energy giant, Brookfield Renewable stock trades 47% below all-time highs. Renewable energy companies generally have a debt-heavy balance sheet, dragging share prices lower on the back of higher interest rates and lower profit margins.

However, the ongoing selloff presents an enticing buying opportunity for investors. Brookfield Renewable expects to invest US$1.5 billion in mergers and acquisitions, which should add US$200 million in incremental cash flows each year.

In the first nine months of 2023, BEP’s funds from operations stood at US$840 million. So, the acquisitions will increase cash flows by more than 20% in the next year. Additionally, Brookfield expects its acquisition-based model to increase cash flow growth by 9% annually through 2028, which should support consistent dividend hikes.

BEP currently offers you a yield of 5.5%, and these payouts have risen by at least 5% in the past decade.

The Foolish takeaway

For you to earn $5,000 in annual dividends, you may have to allocate $100,000 distributed equally between the two stocks, given the average yield of 5%. But your dividend payout may double in seven years if the companies raise dividends by 10% annually.

An investment of $50,000 in a single stock is quite risky. Instead, you must identify similar blue-chip companies and further diversify your dividend portfolio.