It takes money to make money. If you’re just starting out, it’s wise to focus on growing your investment portfolio to the size where it can easily generate substantial income streams later.
However, if you’ve already built a solid foundation and you’re ready to sit back and let your investments partially fund your lifestyle, that’s an equally viable strategy.
For those in the latter camp, understanding the amount of capital required to generate a desired level of passive income is crucial.
Here’s a simple breakdown of how much you would need to invest in two different monthly income exchange-traded funds (ETFs) to achieve an annual income of $10,000.
XEI
First up is iShares S&P/TSX Composite High Dividend Index ETF (TSX:XEI), which holds 75 Canadian dividend stocks for a low 0.22% management expense ratio. As of June 6, XEI pays a 5.38% distribution yield with monthly payments.
Assuming XEI’s most recent May monthly distribution of $0.114 and the current share price at the time of writing of $25.41 remained consistent moving forward, an investor would need to buy roughly $185,747.10 worth of XEI, corresponding to 7,310 shares, to receive $10,000 annually, or $833.34 monthly.
| ETF | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY |
| XEI | $25.41 | 7,310 | $0.114 | $833.34 | Monthly |
HYLD
Next up is Hamilton Enhanced U.S. Covered Call ETF (TSX:HYLD), which uses 25%, or 1.25x leverage on its underlying portfolio of seven other Hamilton covered call ETFs to boost its yield to 11.56% as of June 6.
Assuming HYLD’s most recent May monthly distribution of $0.143 and the current share price at the time of writing of $13.26 remained consistent moving forward, an investor would need to buy roughly $77,221 worth of HYLD, corresponding to 5,828 shares to receive $10,000 annually, or $833.40 monthly.
| ETF | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY |
| HYLD | $13.26 | 5,828 | $0.143 | $833.40 | Monthly |
The Foolish takeaway
There are a few key points to remember when considering passive income through investments like monthly income ETFs.
First, the figures discussed are pre-tax. If you’re investing through a Tax-Free Savings Account (TFSA), you won’t have to worry about taxes impacting your earnings. However, in a non-registered account, the amount you receive each month will be lower after taxes, which will vary depending on your tax bracket.
Second, it’s important to understand that focusing on passive income often means sacrificing potential share price appreciation. For example, with the XEI, the dividend payments typically cause the ETF’s share price to drop slightly on the ex-dividend date.
The same applies to HYLD, but the impact may be more pronounced because its use of covered calls to boost income can further limit share price growth. In HYLD’s case, the 25% leverage can also increase volatility. There’s no free lunch!
Finally, keep in mind that distribution amounts can change—they may increase during good economic times but can also be reduced during downturns. This variability can affect the consistency of your monthly income.
