How I’d Create Substantial Passive Income With a $7,000 Investment Today

How can you build substantial passive income starting today with just $7,000?

Truth be told, it’s not the easiest thing to do.

$7,000 invested at a 10% yield is just $700 per year — and 10% is a far above-average yield.

However, $7,000 is a sum that could grow and compound over time. Also, you always have the ability to contribute more money to your account, adding to your passive income over time. In this article, I’ll explore how I’d start working toward substantial passive income if I were starting with just $7,000 today.

Portfolio strategy

First, I should explore the portfolio strategy I’d use if I were striving for passive income, starting with $7,000 today. Here’s the portfolio allocation I’d go with:

• 80% stocks and exchange-traded funds (ETFs)
• 20% fixed incomes

Dividend stocks would be the overwhelming majority of my portfolio because they offer more yield than Guaranteed Investment Certificates (GICs) these days. Nevertheless, I’d have a bit of money in fixed income. By “fixed income,” I mean things like bond funds and money market funds, as it’s not practical to invest just $1,400 in GICs at most banks.

Assets

Now, I can get into the kinds of assets I’d invest in. As far as fixed incomes go, I’d put that portion of my $7,000 into a Canadian money market ETF.

The rest I’d put into relatively high-yielding dividend stocks. Such stocks have the potential to generate considerable passive income because they pay out a lot of income per dollar invested.

Consider First National Financial (TSX: FN), for example. It’s a Canadian mortgage lender that partners with mortgage brokers to help overlooked borrowers (e.g., the self-employed) find homes. It has a pretty good long-term growth track record (earnings compounding at 9.5% compound annual growth rate over the last 10 years); a 27% net margin; a 27% return on equity (ROE); and a depositless model. So, the stock looks to be doing pretty well on both performance and risk, despite the Bank of Canada’s recent interest rate cuts holding back earnings a bit this year.

With its 6.6% yield, First National stock can pay you about $462.50 per year in dividend income if you invest $7,000 in it today. That might not seem like much, but don’t despair — in the next section, I’ll show you how you can grow your position larger over time so you can take advantage of First National’s high yield.

Re-investment

If you keep investing back into FN stock over time, you can get to a point where you earn much more than $462.50 per year. Here’s how much you’d get if you eventually built up your position up to $100,000 (ignoring the very real possibility of dividend hikes and cuts):

As you can see, by contributing to your accounts regularly and re-investing your dividends, you can eventually reach a position that pays you over $6,600 per year! It will take time and discipline, but with a diversified portfolio of quality dividend stocks, it can be done.