Passive Income: How Much Do You Need to Invest to Make $400 Per Month?

How much you need to invest to make $400/month in passive income depends on the yield of your investment portfolio.

| More on:
Canadian Dollars bills

Source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Building a steady stream of passive income is a common financial goal for many investors. But how much money do you actually need to invest to generate $400 a month? The answer lies in understanding the yield you can expect from your investments. In this article, we’ll break down different investment options to help you figure out what’s required to earn a reliable passive income of $400 per month.

Understanding the basics: Interest rates and GICs

One of the simplest ways to earn passive income is through Guaranteed Investment Certificates (GICs). These are low-risk, fixed-term deposits that you can get at your Canadian bank to earn interest income with the guarantee to get your principal back. Let’s look at an example: if you invest in a one-year GIC offering a 4% annual interest rate, you can calculate how much you’d need to invest to reach $400 a month.

To earn $400 per month, you’ll need a total of $4,800 annually ($400 x 12 months). At a 4% yield, you would need to invest $120,000 to achieve that goal ($4,800 ÷ 0.04). While this is a straightforward option, it’s important to note that GICs typically offer lower total returns compared to other investment avenues, meaning the required investment is relatively high.

Dividend stocks: A higher yield, a smaller investment

For those looking for higher income (and returns) and the potential for a smaller initial investment, dividend stocks could be what you’re seeking. When you invest in dividend-paying stocks, you’re not just buying shares — you’re becoming a part-owner of a company. This ownership entitles you to a portion of the company’s profits through dividends.

However, unlike GICs, dividends are not guaranteed. Companies are only required to pay dividends if they have declared them. So, it’s possible for a stock to pay a dividend this quarter and reduce or even eliminate its dividend in the next quarter. Therefore, it’s crucial to look for companies with a long history of paying reliable and sustainable dividends.

Among the safest and most stable dividend stocks on the Toronto Stock Exchange are Canada’s big banks. Take Bank of Nova Scotia (TSX:BNS), or Scotiabank, as an example. At $79.85 per share at writing, Scotiabank offers a solid 5.3% dividend yield, paid out quarterly. To earn $4,800 annually from this investment, you would need to invest approximately $90,566.

Notice how the required investment for this dividend stock is lower than with a GIC. A 5.3% yield (compared to the 4% GIC) reduces your investment by nearly 25%! This highlights the advantage of choosing higher-yielding dividend stocks when seeking passive income.

Assessing dividend sustainability

While dividend stocks can provide a steady income stream, it’s important to ensure that the dividends are sustainable. For example, Scotiabank’s payout ratio (the percentage of earnings paid as dividends) is expected to be around 65% of adjusted earnings for this fiscal year. This is slightly higher than its usual ratio of 50%, but it remains sustainable. In the 2020 pandemic, Scotiabank’s payout ratio remained sustainable at 67%, demonstrating its ability to weather economic downturns.

If Scotiabank’s results improve with growth potential from both domestic and international markets, its payout ratio could normalize over the next few years, ensuring a reliable income stream for investors.

Building your passive-income portfolio

The amount you need to invest to generate $400/month in passive income ultimately depends on the yield of your investment portfolio. By diversifying across different asset classes, such as GICs and dividend stocks, you can tailor your investment strategy to achieve your income goals.

Most dividend stocks pay out quarterly, but some pay semi-annually, monthly, or annually, so it’s important to consider how income is distributed. To calculate your average monthly passive income, simply determine your expected annual income from your investments and divide it by 12.

Note that dividend stocks also pay out in different months. So, you would receive more income in one month and lower income in another. If you like, you can look up the dividend payable dates of the stocks you’re interested in.

By choosing the right investments, you can start building a reliable source of passive income, one that could steadily grow over time to meet your financial needs.

Should you invest $1,000 in Enbridge right now?

Before you buy stock in Enbridge, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Enbridge wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $20,697.16!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 29 percentage points since 2013*.

See the Top Stocks * Returns as of 3/20/25

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 Kay Ng has positions in Bank Of Nova Scotia. The Motley Fool recommends Bank Of Nova Scotia. The Motley Fool has a disclosure policy.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Dividend Stocks

Canadian Red maple leaves seamless wallpaper pattern
Dividend Stocks

5 Canadian Dividend Stocks to Buy and Hold for the Next 20 Years

These Canadian stocks have paid dividends for decades, making them reliable investments to generate regular passive income.

Read more »

Dividend Stocks

3 Canadian REIT Stocks to Buy and Hold for the Next Quarter-Century

These three Canadian REITs trade cheaply and are highly reliable, making them some of the best stocks you can buy…

Read more »

A train passes Morant's curve in Banff National Park in the Canadian Rockies.
Dividend Stocks

1 Practically Perfect Canadian Stock Down 24% to Buy Now and Hold for Life!

CNR stock is a top Canadian stock for investors, especially with shares down on the TSX today.

Read more »

Canada national flag waving in wind on clear day
Dividend Stocks

The Best Canadian Stocks to Buy Right Away With $30,000

If you have $30,000 you're willing to invest, these are some of the first Canadian stocks to consider on your…

Read more »

rail train
Dividend Stocks

What to Know About Canadian Pacific Railway Stock for 2025

CP stock has now gone through a major merger, so what do investors have to look forward to?

Read more »

ways to boost income
Dividend Stocks

Top Canadian Value Stocks I’d Buy for Dividend Growth and Appreciation

If you are looking for income and capital appreciation, here are three Canadian value stocks for a great total return…

Read more »

coins jump into piggy bank
Dividend Stocks

The Smartest Canadian Stock to Buy With $2,000 Right Now

The company’s powerful combination of growth, income, and value, positions it well to deliver solid returns, making it a smart…

Read more »

Transparent umbrella under heavy rain against water drops splash background. Rainy weather concept.
Dividend Stocks

This 10.6 Percent Dividend Stock Pays Cash Every Single Month

Are you looking to invest for a rainy day? This 10.6% dividend stock pays cash every month, irrespective of the…

Read more »