A blueprint is a master plan or guide you follow before starting a project or creating something. Even in the stock market, you need a sound blueprint for a goal like building a passive-income portfolio. Dividend investing is a proven strategy that generates income without doing anything.
The hardest part of the process is the beginning. You need to shape the foundation of your portfolio first to ensure solid passive-income streams. If your dividend income grows and is significant or stable enough, you can cope with rising inflation and preserve purchasing power.
Anchor stock
Fortunately, $10,000 is a good starting capital on the TSX. You also have the advantage if you’re young and investing early. The first step is choosing the anchor stock, which usually is a large-cap stock, an industry leader with a strong earning power, and time-tested to withstand market crashes.
The criteria are straightforward because they assume the portfolio builder has a low-risk profile or is a risk-averse investor. All other stocks you will accumulate after are for diversification purposes and can be changed or replaced if necessary. Meanwhile, the anchor stock is always the primary source of passive income and often a lifetime holding.
Speed up the process
In the early phase, the advice is not to pocket the dividends but to reinvest them to buy more shares. You become enterprising because you turn the dividends into a second passive-income source. Since the power of compounding is at play, you speed up the process and reach the goal sooner.
Building a solid passive-income portfolio takes time and requires patience. As you keep reinvesting the dividends, you’ll feel at a certain period that it’s easier to make money as your money grows.
It will help if you own a Tax-Free Savings Account (TFSA) and a Registered Retirement Savings Plan (RRSP). Money growth in the tax-advantaged investment account and tax-sheltered plan is tax-free. Hold your anchor stock and other stocks in one or both to take advantage of their excellent features.
No-brainer choice
Royal Bank of Canada (TSX: RY) is a no-brainer choice if you need an anchor in your portfolio. This $186 billion financial institution belongs to Canada’s largest industry by market capitalization and revenue. If you recall, the country’s giant lenders were unscathed during the 2008 financial crisis and global pandemic.
Last year, big banks didn’t report record profits like in previous years because of higher provisions for credit losses (PCL). In fiscal 2023, RBC’s net income declined 6% to $14.9 billion versus fiscal 2022, while PCL jumped 410% year over year to $2.46 billion.
Still, its president and chief executive officer, Dave McKay, said RBC’s capital position remained robust and should support volume growth in 2024. Remember, this bank stock’s dividend track record is 154 years and not in danger, despite the uncertainty. If you invest today, the share price is $132.34, while the dividend yield is 4.17%.
Main ingredients
Building a solid passive-income portfolio begins with a blueprint, a small capital, and an all-weather anchor stock. These three ingredients should strengthen the foundation, ensure steady income streams in the future, and protect against market forces.
