Earning passive income through stock investments can be a good way to supplement your lifestyle. There are benefits to buying stocks for income. But how much cash do you need to earn $300 per month in average passive income?
How much cash do you need to earn $300 per month?
The answer really depends. It depends on the average yield across the stock portfolio, index, or ETF (exchange traded fund) that you choose to own. For example, the iShares S&P/TSX Composite High Dividend Index ETF earns an average dividend yield of 5.47%. It is made up of some of the largest dividend-paying companies in Canada.
If you divide the annual desired income ($300 times 12 months equals $3,600) by the 5.47% yield, you will find that you would need to invest at least $66,000 to earn that income.
While many of the stocks in the High Dividend Index are likely to maintain their dividend over the long term, not all are great businesses.
Over the past 10 years, the High Dividend Index has only earned a 6.6% total return (i.e., you got your dividends and a ~1% capital return). When compared to other indexes (like the S&P 500) that is a drastic underperformance.
Don’t sacrifice your capital for passive income
When you own an index, you don’t get to choose your sector or stock allocation. You own the index mix, both good and bad stocks. For many, this is perfectly acceptable. However, you have to be aware that despite the income you earn, the total returns may not really be that good.
Owning a portfolio of stocks can be a good alternative. You will require time, effort, and curiosity to learn about individual companies. However, it can be very rewarding.
When you choose your own portfolio, you can weight it as you wish. Likewise, you can diversify it as aggressively, passively, or balanced as fits your financial plan. Equities allow you to cater your portfolio to its goals.
It does come at a cost. You may not earn the highest dividend yield (and largest amount of passive income) with this approach. Yet, the hope is that over the long term, the returns would be far superior to an index.
Fortis: A quality Canadian dividend-growth stock
One individual stock that is intriguing as an anchor for any passive income portfolio is Fortis (TSX: FTS). Right now, it only yields 4.3%. However, it has a 50-year record of consecutively increasing its annual dividend. That is one of the longest track records in Canada.
Its stock has delivered a 10% compounded annual total return over the past decade. While it is not a massive return, the company has delivered that with very limited risk.
Fortis is one of Canada’s largest utility businesses with operations across North America. It is not growing fast, but it is steadily growing by around 5% a year. The utility owner and operator has a low-risk capital plan. Its solid balance sheet should help ensure that.
Right now, it yields 4.3%. However, with its dividend growing by 4-6% a year for the near future, your yield on cost will only grow from here. Chances are good that forward returns will continue to replicate the past.
The takeaway on passive income
If you want to earn $300 per month in passive investment income, you will likely need between $65,000 and $85,000 invested to hit that threshold (depending on your average portfolio yield).
While high yields can be attractive, you have to consider your risk tolerance. Don’t sacrifice your capital in order to earn passive income. Rather, look for both capital growth and passive income returns that can endure for the long term.
