Can you really build a $35,000 annual passive-income stream starting with just $500 monthly investments?
It might sound too good to be true but — over a period of decades — it can be done.
A typical investing lifetime is about 30 years. $500 per month over 30 years is $180,000. If you simply sat in cash for 30 years and then invested $180,000 at the end at a 4% rate of return, you’d get $7,200 per month in passive income. That’s not bad. But with periodic monthly contributions, your earlier investments grow over longer periods of time, resulting in higher ending income. In this article, I’ll explore how to build a $35,000 annual passive-income stream by investing just $500 per month.
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What it will take to get there
Before getting into investment options, we need to look at the raw math of how to get $35,000 per year in dividend income. This requires an assumption of an attainable yield. In this author’s opinion, 4% is an obtainable low-risk yield, as it’s about what you’d get if you stripped all the no or low dividend payers (e.g., tech, junior gold) from the TSX index.
To get $35,000 per year on a 4% yielding portfolio requires $875,000. The math on that is simply 35,000 divided by 0.04.
Next, we need to assess how long it would take $500 monthly contributions, each invested and compounded at a 10% rate of return, to reach $875,000. The math on that is a little more complex, but to make a long story short, it ends up being 27.6 years.
So, yes, you can get to $35,000 per year in passive income by investing just $500 per month at an average stock market rate of return. And you can do it within a typical investing lifetime.
Assets that could make this possible
Having established that you can achieve the investment objective described at the start of this article, we can now get into the assets required to make it happen.
First off, the 10% rate of return in the initial compounding period. TSX ETFs like iShares S&P/TSX Capped Composite Index Fund (TSX: XIC) usually do about 10% per year in total returns. Some years, it does more; some years, it does less, but the long-term average is remarkably consistent.
Index funds like XIC are good ones to get started with because they have low fees and high diversification. Low fees increase your take home return, high diversification reduces your risk. Also, XIC, in particular, is very popular and widely traded, which results in tight bid-ask spreads (low spread cost). So, it’s a good one to hold.
As for getting a 4% return on your $875,000 ending amount, that can be done with a typical TSX dividend fund. There are many good ones to choose from; in past articles, I’ve mentioned BMO Canadian Dividend ETF, which has done quite well over the years. Whatever you ultimately pick, it’s having the diligence to save regularly that will really take you where you want to go.
