Holding cash in your locker is not the wisest. Cash is a depleting resource that loses value due to inflation. A rule of thumb is to have at least six months of your income in an emergency fund. But when the economic situation is uncertain, it is better to have 12 months of salary accumulated in the emergency fund, which can be in the form of a portfolio.
If your average monthly income is $4,000, in a normal scenario, you should have $20,000–$24,000 in an emergency fund. But in the current environment, you might want to consider having $45,000–$48,000 in an emergency fund. When I say emergency fund, do not keep it only in cash form. You can invest $20,000 in passive income stocks, whose share prices do not fluctuate much, and earn a monthly income.
How to make your $20,000 portfolio pay you monthly
SmartCentres REIT
REITs are a good way to earn monthly income, and retail REITs tend to give some of the best yields. A commercial or retail property gets higher rent than a residential or industrial property. SmartCentres REIT (TSX:SRU.UN) is the largest retail REIT in Canada, and Walmart is a key tenant. Having a recession-proof retailer as its largest tenant gives SmartCentres REIT resilience on dividends even during a crisis. It continued to pay dividends without any cuts during the pandemic and the 2008 financial crisis.
The REIT has a dividend payout ratio of 84.1% of its adjusted funds from operations, which is higher than most retail REITs. It is operating at a healthy occupancy rate of 98.6%. The payout ratio is concerning, but the falling interest rate and rising income from portfolio properties could help it reduce the payout ratio. Investors should not expect any dividend growth till the payout ratio stabilizes.
Freehold Royalties
Freehold Royalties (TSX:FRU) pays monthly interest from the royalty money it gets from oil producers ConocoPhillips, ExxonMobil, and other small oil companies. These producers drill oil wells on Freehold Properties’ land in the United States and Canada and share a percentage of the sales as royalty.
Freehold’s stock is currently at a sweet spot as more oil is being drilled. Although the advantage of high oil prices from sanctions on Russian oil has faded, higher output and proximity to the Gulf Coast help Freehold command a premium for its US assets. The company uses the money received from royalties to pay dividends, repay debt, and acquire new reserves. FRU stock’s target dividend payout ratio is 60%, but the oil price decline has increased the payout ratio to 78% in the second quarter.
Freehold can sustain its current monthly dividend of $0.09 even at US$50 WTI per barrel. Thankfully, the WTI is above US$60 even after the 10% tariff on Canadian oil imports to the United States. This leaves Freehold with some free funds from operations after dividends to buy new reserves or repay debt if there aren’t any good reserves available for purchase.
Timbercreek Financial is a high-yield addition to your portfolio
Timbercreek Financial (TSX:TF) provides short-term mortgages to REITs to develop and acquire income-generating properties. The lender has been witnessing a surge in loan repayments but a slow uptick in loan generation. The Bank of Canada’s interest rate cuts were supposed to boost lending activity. However, it is taking time, as tariff uncertainty restrains REITs from starting major development projects.
The new loan decline has resulted in a decrease in Timbercreek Financial’s net interest income and increased its dividend payout ratio to 97.8% in the second quarter from 87.8% a year ago. While this raises concerns around the sustainability of dividends, the lender has a rate floor on mortgages, which reduces the impact of interest rate cuts. Thus, Timbercreek’s weighted average interest rate on its mortgage portfolio fell by 1.2% to 8.6% from 9.8% a year ago, lower than the 2.25% rate cut by the Bank of Canada.
The above three stocks can help you build an emergency fund portfolio that pays $1,586 in annual passive income.
| Stock | Dividend Yield | Current Share Price | Investment | Share Count | Annual Dividend |
| SmartCentres REIT | $1.85 | $27.00 | $7,000 | 259 | $479.15 |
| Freehold Royalties | $1.08 | $13.38 | $7,000 | 523 | $564.84 |
| Timbercreek Financial | $0.69 | $7.63 | $6,000 | 786 | $542.34 |
| Total | $20,000 | $1,586.33 |
