Having $5,000 is a good start for investing in a passive income portfolio. The Tax-Free Savings Account (TFSA) is a great opportunity to earn passive income without having to worry about income taxes. Because of higher interest rates since 2022, stock valuations are generally cheaper compared to the long-term normal valuation. Therefore, it’s a good time to invest.
To build a bulletproof monthly passive income portfolio, here are a few tips you should keep at the back of your mind. Look for businesses that make quality earnings or cash flows that are resilient and growing. These businesses should also have solid balance sheets such that they’re not overly leveraged, as businesses could get into trouble if they have too much debt and high interest costs.
Additionally, you would want to buy stocks at discounts to what they’re worth. The analyst consensus price target is a good gauge for initial research. It may be obvious but you might consider stocks that pay sufficient yields. Lastly, spread your risk by diversifying your passive income portfolio to ensure you earn quality income from different industries and sectors.
Dream Industrial REIT
Dream Industrial REIT (TSX:DIR.UN) could be a good buy on the pullback. The Canadian real estate investment trust (REIT) owns, operates, and manages a $7.9 billion diversified portfolio of industrial real estate across Canada and Europe. Its occupancy rate is high at about 96%, as expected of the defensive industrial real estate industry.
Furthermore, it maintains a solid balance sheet with a net debt to asset ratio of 36%. Its fundamentals also look good. In its March investor presentation, management highlighted that the REIT has organic growth from strong mark-to-market rent. Specifically, the recent market versus in-place rent is 30%, suggesting that demand for its industrial spaces continues to be strong.
At $12.35 per unit at writing, the stock has corrected just over 17% from its 52-week high. According to TMX, the analyst consensus 12-month price target is $16.07, representing a decent discount of 23% (and an eye-catching 30% near-term upside potential).
Importantly, Dream Industrial REIT pays out a monthly cash distribution, yielding almost 5.7%. This cash distribution is sustainable based on its funds from operations generation.
Exchange Income Corp.
Other than Canadian REITs, there aren’t too many choices for monthly income. Exchange Income (TSX:EIF) is a rare exception. It acquires businesses in aviation services and aerospace, and manufacturing that offer essential products and services to niche markets. From this diversified portfolio of subsidiaries, it earns cash flows and has been paying out a reliable and growing monthly dividend. Since 2014, it has increased its dividend by 56% (or a growth rate of just over 4.5% per year).
Management understands the importance of the monthly dividend to shareholders. Investors get paid well to wait. The stock is down more than 15% from its 52-week high, pushing its yield higher. At the recent price of $46.79 per share, the stock yields just north of 5.6%. This dividend is covered by earnings. Moreover, analysts believe the stock trades at a nice discount of about 27%.
Investors looking to build monthly passive income can start their research in Canadian REITs such as Exchange Income that offer nice yields.
