Passive-income portfolios are among the best portfolios for investors in 2024. With tech stocks at all-time highs and extreme valuations, there’s never been a better time to invest in high-yield non-tech sectors. To be fair, even tech stocks offer a bit of income now, as most of the big U.S. tech names started paying dividends in the last few years. Still, the yields are small.
In this article, I will explore how to build a bulletproof passive income portfolio starting with $7,000 in 2024.
Step one: Open a brokerage account (ideally a self-directed TFSA)
The first step, if you haven’t done it already, is to open a brokerage account. A brokerage account is a special type of “bank account” that lets you trade stocks, bonds, and funds. You can open one by talking to your bank or a joining service like WealthSimple. If you have Tax-Free Savings Account (TFSA) contribution room, you could consider opening your brokerage account within a self-directed TFSA. Depending on your age, you may be able to shelter up to $95,000 worth of investments from taxation.
Step two: Pick investments
Once you have your brokerage account open, you need to pick investments. There are many to choose from. In this article, I will cover three: index funds, Guaranteed Investment Certificates (GICs) and individual stocks.
Index funds
Index funds are diversified portfolios of stocks and bonds that trade on stock exchanges. They offer low risk and low fees and have a tendency to outperform actively managed funds after fees. Some good index funds to consider are iShares MSCI ACWI ETF for global stocks, Vanguard S&P 500 Index Fund for U.S. stocks, and iShares S&P/TSX Capped Composite ETF for Canadian stocks.
GICs
GICs are bond-like instruments offered by banks. The way they work is, you agree to have your money locked up for a set period of time, and you get some interest at the end. In recent years, the interest rate on GICs has gone as high as 5%. The Bank of Canada has started cutting interest rates, so GIC interest may be a bit lower now than it was in the past.
Individual stocks
Last but not least, we have individual stocks. These are the riskiest of the three investment options considered here. Individual stocks expose you to individual-company risk but also the potential for “alpha” (return above the benchmark return). If chosen carefully, they can sometimes be very profitable to hold.
Consider Fortis (TSX:FTS), for example. It’s a Canadian utility stock that’s very popular with retirees, portfolio managers, and other serious investors. It has a 4.2% dividend yield and has raised its dividend every year for 50 years straight, making it a Dividend King.
Fortis has a lot of things going for it. First, as a regulated utility, it enjoys stable revenue even in recessions. Second, 98% of its operations are regulated utilities, giving it a degree of government protection. Third, it has invested in expansion over the years, acquiring an empire spanning two continents. Fourth and finally, it’s one of the few TSX utilities with a payout ratio below 100%. These characteristics all add up to make Fortis stock a popular one in Canadian portfolios.
