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6 Ways to Soak Up Passive Income in Retirement

A survey from Sun Life Financial released in early 2018 revealed that a quarter of retired Canadians are wrestling with debt. A Canadian Imperial Bank of Commerce survey last year showed that by age 55, 43% of women and 27% of men lacked a retirement plan. Very few individuals have come close to the magic number of $756,000 that will be required for a comfortable retirement in Canada.

Saving aggressively and investing wisely is the best way to prepare for retirement, but for those who are retired or on the cusp, there are ways to generate passive income in your golden years.

Here are 6 ways individuals can soak up passive income in retirement!


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1. Own Dividend-Growth Stocks

Stocks that have posted a steady stream of dividend-growth are great options for investors looking for long-term income. Dividends are purely passive income. Depending on the stock, dividends are paid out at varying times throughout the year. Investing in stocks that have provided regular dividend-growth can be compared to giving yourself a raise every year.

Fortis (TSX:FTS)(NYSE:FTS) is well on its way to being crowned a dividend king as we look ahead to the next decade. When it comes to scouting for dividend-growth, Fortis is the best of the bunch on the TSX. In 2018 Fortis achieved its 45th consecutive year of dividend growth. The company increased its quarterly dividend to $0.45 per share which represents a 3.8% yield as of close on January 8.

Fortis is in a league of its own on the TSX, but there are still many other solid options. Investors should target dividend stocks that have achieved at least a decade of dividend-growth in order to maximize the potential of this strategy.


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2. Investing in Rental Properties

Generating a steady stream of rental income from real estate is one of the most rewarding paths on this list. It is also one of the most challenging. Even if the asset is owned outright, there is substantial overhead involved in managing a rental property, including utility bills and regular maintenance. This strategy is also controversial, with some arguing that the challenges that come with collecting rental income fly in the face of “passive investing”.

Although challenging, it is also a viable strategy for retirees or those nearing retirement, especially in an era where the very nature of work is being redefined. Baby boomers will be beneficiaries of the largest wealth transfer in history, and much of that wealth will be carried through in the form of real estate. Instead of pursuing liquidation, some Canadians may choose to convert these assets into a reliable vehicle for income generation that can stretch over decades.


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3. High-Yield Savings Accounts

A high-yield savings account is an option for those on the hunt for flexibility when it comes to passive income generation. The historically low interest rate environment has made rate hunting a challenge, but there are still several accounts available to consumers which are able to keep up with inflation.

Equitable Group Inc. (TSX:EQB) launched a direct banking operation branded as EQ Bank in January 2016. The bank hit the ground running and offered a high-interest savings account that boasted a 3% every day interest return. That rate has since dropped to 2.3%, but this is still one of the top rates among the smaller financial institutions that offer this service. HISAs at Big Six banks almost always boast an interest rate that falls below inflation.


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4. Invest in Bonds

Most balanced portfolios will contain a fixed allocation in bonds, usually up to 20%. However, these income vehicles have fallen out of favour in recent years among self-directed investors. The historically low interest rate environment has eaten into bond yields over the past decade, and this has driven investors to dividend stocks.

According to Bank of Montreal Asset Management, a bond-heavy portfolio 20 years ago required nearly $1 million in order to generate $50,000 a year. This portfolio would contain roughly two thirds in bonds and a third in equities. Today, with yields heavily depreciated, a similar portfolio would require over $2 million in order to generate the same $50,000 investment income. Bonds are an option for the most conservative of investors who are willing to sacrifice flexibility and return in exchange for stability and guaranteed income.


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5. Index Funds

Passive investing through index funds and ETFs has gained enormous traction this decade. Outflows from actively managed funds to index funds and ETFs has consistently grown into 2019, but there were signs of change last year. In November 2018 Goldman Sachs published a report that showed outflows from active mutual funds stood at $219 billion, which represented the smallest level of outflows since 2014.

A tightening interest rate environment and central banks putting the brakes on easy monetary policies has put the squeeze on index funds and ETFs. However, these are still viable options for investors looking for a truly passive investment approach. The direct bank Tangerine, which is owned by Scotiabank, offers high-performing index funds catered to an investor’s risk tolerance with an MER of 1.07%. Investors also have the option to dip into ETFs that track major indexes and tend to boast a very low MER.


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6. High-Yield Dividend Stocks

Investors chasing higher yields do have options to consider on the TSX. The highest yield is not always the best investment, and these equities often come with higher overall risk. This can be the case when a company’s stock is struggling, which could portend a dividend cut. This is something shareholders always want to avoid.

Of course, high yields are also extremely rewarding over the long haul. TransAlta Renewables (TSX:RNW) has grown its renewable energy segment significantly in recent years. The stock boasts a monthly dividend payout which currently stands at $0.07833 per share. This represents an attractive 8.6% yield as of close on January 8.


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Start Building Passive Income!

At the beginning of this article, I discussed a CIBC poll on the financial priorities of Canadians. Only 6% of respondents in that poll said that retirement was their top financial priority. Establishing passive income will allow Canadians to take control of their finances in retirement, which will make other priorities like servicing debt and keeping up with expenses much less challenging.

Whether you are in retirement or looking to the future, it is never too late to start building passive income. Consider some of the options we have gone over today and remember to pursue strategies that are right for you and your time frame.

Fool contributor Ambrose O’Callaghan has no position in any stocks mentioned. The Motley Fool has no position in any stocks mentioned.


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