How to Build a Bulletproof Monthly Passive-Income Portfolio With Just $5,000

Exchange-traded funds such as the XDIV can help you earn a steady stream of passive income in 2024, with just $5,000.

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Creating multiple streams of passive income is a proven strategy for building long-term wealth and accelerating retirement plans. Investing in quality dividend stocks is one low-cost way to begin a passive-income stream.

Here, you identify a portfolio of dividend-paying companies that can generate steady cash flows across market cycles. Additionally, you need to look at various other metrics, such as a company’s dividend payout ratio, balance sheet debt, and the potential for earnings growth.

Ideally, you would want a company to offer you a tasty dividend payout and increase these payouts each year. Further, a widening earnings base translates to capital gains, enhancing the cumulative returns for shareholders in the process.

However, it’s not easy to consistently identify winning bets in dividend stocks. In the last two years, headwinds such as rising interest rates and inflation have forced companies across sectors to lower their dividend yields.

For instance, Canadian companies such as Algonquin Power & Utilities and Northwest Healthcare reduced their payouts due to the rising cost of debt and weak fundamentals. While these companies are part of recession-resistant sectors, a debt-heavy balance sheet meant the payout ratio was unsustainable.

Instead, investors can diversify their portfolios and lower investment risk by holding dividend-paying ETFs, or exchange-traded funds, such as iShares Core MSCI Canadian Dividend Index ETF (TSX:XDIV). Let’s see why.

The XDIV ETF can help you earn passive income

Unlike most other ETFs in Canada, iShares Core MSCI Canadian Dividend Index ETF has an attractive dividend yield and a monthly payout. The XDIV ETF is a low-cost portfolio of TSX stocks that offer above-average dividend yields with a steady or rising payout. Designed to be a long-term holding, the XDIV is ideal for those who would like to see their dividends grow over time.

Companies in the XDIV ETF have strong financials, steady earnings, and robust balance sheets. The ETF holds 19 stocks across sectors such as financials, energy, utilities, communication, materials, and consumer discretionary. The top five holdings of the XDIV ETF are Suncor Energy, Pembina Pipeline, Royal Bank of Canada, Sun Life Financial, and Fortis, which account for more than 45% of the ETF. It means the other 14 stocks account for 55% of XDIV.

The XDIV ETF currently pays shareholders a monthly dividend of $0.13 per share, translating to a forward yield of almost 6%, which is quite juicy. Additionally, these payouts have doubled in the last seven years, enhancing the yield-at-cost.

XDIV ETF$26.23191$0.13$24.83Monthly

With a management fee of 0.10% and an expense ratio of 0.11%, the XDIV ETF is not too expensive. Launched in June 2017, the fund has returned 9.5% annually in the past five years, comfortably outpacing the TSX index.

A $5,000 investment in the XDIV ETF would help you earn close to $300 in annual dividends. If the dividends are raised by 10% annually, your payout will double in the next seven years.

Income-seeking investors can consider further diversifying their portfolio and adding other high-dividend ETFs to benefit from a steady stream of passive income for life.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Aditya Raghunath has positions in Algonquin Power & Utilities and Fortis. The Motley Fool recommends Fortis, NorthWest Healthcare Properties Real Estate Investment Trust, and Pembina Pipeline. The Motley Fool has a disclosure policy.

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