Earning passive income in the stock market is an important income supplement for many investors, especially retirees. $500 of extra income per month can make a big difference when you no longer earn a regular salary.
If you have spare capital sitting in savings that you would like to invest, here are some ideas of how to achieve an extra $500 per month (or $6,000 annualized) in passive investment income.
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Index funds for passive income
Firstly, you could buy an index fund. Many investors like this option because they don’t want to spend the time analyzing and understanding individual stocks. They don’t mind the diversification of holding an index.
A Canadian index ETF (exchange-traded fund) such as iShares S&P/TSX 60 Index (TSX: XIU) trades on the performance of the top 60 stocks on the TSX. Over the past few years, holding this index has been a pretty good choice. It is up 28.89% in the past year.
It has a trailing yield of 2.33%. While it is not the highest yield, that is the sacrifice you make to only hold the index. To calculate how to earn $500 per month of passive income, you divide $6,000 ($500 X 12 months) by the yield (2.33% in this case). You get $257,510. That is a substantial sum required to be invested.
ETFs for passive income
Another option is to focus on a higher-yielding ETF. iShares Core MSCI Canadian Quality Dividend Index ETF (TSX: XDIV) focuses on some of the largest dividend-paying companies on the TSX (think banks, insurance companies, utilities, and pipelines). It yields 3.76% today.
Using the same formula as above ($6,000 divided by 3.76%), you would need $159,574 invested to earn $500 on average monthly.
If you like individual stocks, earn 5% with this mini-portfolio
The last alternative is that an investor can build their own passive-income-producing portfolio. This way, you can pick individual stocks and sectors you are interested in. You can really tailor the portfolio to your own preferences. This is not for everyone. However, if you like to get into the weeds with individual companies, you can increase your yield substantially.
A stock like Dream Industrial REIT (TSX: DIR.UN) yields 5.2% today. It operates a high-quality portfolio of industrial properties across Canada, the United States, and Europe.
The company has strong +95% occupancy, a good balance sheet, and a growing portfolio of joint venture partnerships that earn it attractive returns. Its payout ratio has rapidly declined, so its passive-income stream is very safe and could even grow in the years ahead.
Another stock with a higher yield is Mullen Group (TSX: MTL). It operates a key network of logistics and transport businesses across Western Canada and the United States. Mullen stock earns a 5% yield and has a history of regularly growing its dividend.
Lastly, Pembina Pipeline (TSX: PPL) stock yields 5.1% today. It has a crucial energy infrastructure business in Western Canada. Over 85% of its income is contracted.
That contracted income widely supports its dividend payments. Pembina has an attractive growth portfolio that includes an LNG terminal in construction. You collect your income here, but there is capital upside as these projects come online.
The Foolish takeaway
Across this mini-stock portfolio, you would earn a 5.1% dividend yield. You would need to invest only $117,647 ($6,000 divided by 5.1%) to earn an average of $500 of monthly passive income. That is less than half the capital you would need if you just bought and held the TSX Index!
No one approach is right, and each depends on your personality and risk tolerance. Buying individual stocks is not for everyone, but it can help you hit your retirement passive-income goals faster.
