Is it possible to get a substantial amount of passive income going with a relatively small amount of money — let’s say $7,000 — invested upfront?
The answer to that question is yes and no.
While it is possible to get started on the path to significant passive income with a small sum invested upfront, the initial sum won’t produce that much income. However, you can get some passive income coming in with a small starting amount. And by adding to your investment account over time, you can grow the annual income to a substantial amount. In this article, I explore how I’d turn $7,000 into $1,400 in annual passive income through a strategy known as dollar cost averaging.
How much income you could get from the initial $7,000 position
Before exploring how dollar cost averaging works, I should explore how much dividend income you could get on an initial $7,000 investment. Basically, I don’t think that $1,400 per year on that amount is a realistic sum, but, as I’ll show later, it is possible to eventually get there through dollar cost averaging and re-investment.
While it’s possible to find high-yield assets out there that pay back 10% of your investment each year, they aren’t always the best investments. The problem is that they get their high yields partially by being beaten-down investments that investors see as risky. You can do well by fishing in the high-yield pond, but it’s a practice best left to professionals.
To gauge how much you could realistically earn off just $7,000, you could look at the yield on a typical TSX dividend fund. That would give you an idea of how much you could get at a relatively low level of risk.
Let’s use BMO Canadian Dividend Index ETF (TSX:ZDV) as an example.
ZDV is a Canadian dividend fund that invests in 54, mostly large-cap, Canadian dividend stocks. The TSX 60 contains 60 stocks, so ZDV represents a broad swath of the Canadian blue chip dividend universe.
At today’s price, ZDV has a 3.6% yield. That means that if you invest $7,000 in it, you get $252 back in annual passive income. That’s a far cry from $1,400, but it could be a start on your path to $1,400 in annual dividend income.
It’s worth considering diversified dividend funds like ZDV when building a passive-income portfolio because they are highly diversified, which reduces their risk considerably. Additionally, such funds often have low fees, which reduces the amount of your return you pay to fund managers — a major source of return loss in actively managed funds.
How you could grow your dividend income to $1,400
There are two ways in which you can grow your dividend income from a fund like ZDV to $1,400 per year:
- You could re-invest the dividends. Over a period of 30 years — a typical investing lifetime — this could easily grow a $252 starting amount to $1,400.
- You could contribute to your position gradually over time, a strategy known as dollar cost averaging. By dollar cost averaging, you “average out” your cost basis, which reduces the impact of big price swings on your investment. You also increase the size of your position and, therefore, the dividend income.
By dollar cost averaging into quality dividend funds, you increase your income over time. Keep at it, and you’ll get to $1,400 in annual dividends soon enough.
