Creating a stream of passive income from an investment portfolio is an appealing goal for many, but achieving it involves more than simply maximizing your Tax-Free Savings Account (TFSA) contributions and selecting a few high-yielding, Canadian blue-chip stocks.
While gravitating towards stocks with yields over 7% might seem like a straightforward path to income, this strategy often leads to a concentrated portfolio dominated by telecoms, pipelines, and perhaps a bank or two. Such a narrow focus can expose you to sector-specific risks and reduce the diversification of your investments.
Here’s my “recipe card” for crafting a bulletproof monthly passive-income portfolio with $25,000, focusing on exchange-traded funds (ETFs). This approach offers a balanced mix of assets, ensuring both stability and a steady flow of income, tailored for the realities of 2024.
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Setting some ground rules
For a passive-income portfolio, it’s crucial to meet certain conditions to ensure it aligns with my goals. Here’s what I’m looking for when selecting the right funds:
- An annualized yield of at least 5%: On a $25,000 investment, this translates to $1,250 annually, or approximately $104.17 monthly. This target yield will provide a solid foundation for generating steady passive income.
- Diversification across sectors and countries, including Canada and the U.S.: This strategy minimizes risk by not putting all eggs in one basket and takes advantage of different market dynamics and opportunities across geographies.
- Inclusion of non-equity assets, such as bonds, preferred shares, and real estate investment trusts: These assets can offer more stability and income consistency than stocks alone, making them an essential part of a well-rounded, income-generating portfolio.
- Monthly payouts: Unlike most dividend stocks, which pay quarterly, I prefer investments that distribute income on a monthly basis. This ensures a regular income stream that better aligns with monthly expenses and financial planning needs.
What ETFs to buy?
My strategy for a bulletproof $25,000 passive-income portfolio begins with allocating $20,000 towards BMO Monthly Income ETF (TSX: ZMI). ZMI stands out as a versatile, multi-asset ETF that includes a mix of global dividend stocks, employs covered call strategies, and invests in corporate bonds and preferred shares.
With its monthly distribution setup, ZMI is particularly appealing to those seeking regular income. At the time of writing, it boasts an annualized yield of 5.14%, aligning well with our goal of generating a steady income stream.
The remaining $5,000 of the portfolio is dedicated to complementing the assets in ZMI with those it may lack, through BMO Equal Weight REITs Index ETF (TSX: ZRE). This ETF provides focused exposure to the real estate sector, offering a different set of risk and return characteristics compared to the broader market.
ZRE also distributes income on a monthly basis and offers an annualized yield of 5.35%. This addition not only enhances the portfolio’s diversification but also leverages the growth potential and income stability associated with real estate investments.
