Written by Puja Tayal at The Motley Fool Canada
The markets run on human sentiments. Passive income can help you control your fear. The Tax-Free Savings Account (TFSA) gives you the advantage of making your investment returns tax-free and even reinvesting them tax-free. You can use this advantage to reinvest the dividends and compound your returns.
How to earn $500/month in passive income
Let’s take two scenarios:
In the first scenario, you invest $500 every month or $6,000 a year in a bunch of stocks and lock in a 5.5% dividend yield. You withdraw the dividend your portfolio earns. In this scenario, it will take 18 years and a $1.08 million investment ($6,000 x 18) to earn around $500 per month in passive income.
In the second scenario, you invest $6,000 annually and lock in a 5.5% dividend yield. But you reinvest the dividend income in stocks and lock in a 5.5% yield. In this scenario, it will take 13 years and a $78,000 investment ($6,000 x 13) to earn around $500 per month in passive income. The table below can help you see the effects of compounding.
5.5% Dividend Yield
Remember, the table is an estimate, assuming your portfolio earns a 5.5% dividend yield annually and none of your stocks cut dividends. But the stock market is dynamic. Things change, sometimes in our favour and sometimes against our expectations.
At best, you can try to keep your portfolio dividend yield over 5.5% and change your strategy if the company you invested in cuts dividends.
Two stocks to get started on your $500/month passive income goal
BCE (TSX:BCE) is a dividend aristocrat that has been paying dividends for over 40 years without slashing them. The stock aims to pay out a $3.87 dividend per share in 2023 in four quarterly instalments and has already paid its first instalment of $0.9675 in April. As the stock trades below $64, you can lock in an annual dividend yield of 6.1% ($3.87/$63.43). Moreover, the stock has a five-year average dividend yield of 5.57%.
BCE meets the two requirements of our framework, regular dividends for decades and a 5.5% average yield.
BCE gives an additional advantage of 5% average annual dividend growth and a dividend reinvestment plan (DRIP). The DRIP buys the stock from the dividend money without brokerage commissions, fees, or service charges. All these features make BCE an ideal stock to put your financial goal into action.
Like BCE, TC Energy (TSX:TRP) has a 23-year history of paying dividends and growing them at a 7% compounded annual growth rate (CAGR). But the pipeline company has slowed its dividend growth rate to 3% as it channels the funds towards building more gas pipelines.
TC Energy stock is trading closer to its 52-week low of $50.70, which has increased its dividend yield to 6.84%. The management aims to pay a $3.72 dividend in 2023 and has already declared two of the four quarterly dividends. It also aims to grow its dividend by 3-5% in the coming years.
While TC Energy poses a risk, the company has the cash flow to maintain its dividend rate. In the worst-case scenario, it might pause the dividend growth. By investing in this stock at its low, you can lock in a 6.8% yield, which is way more than our targeted yield of 5.5%.
Investing $3,000 in each of the above two stocks can help you lock in higher yield and dividend growth. It may not be possible to lock in a 5.5% yield every year. This high yield and dividend growth can fill any gaps from lower-yielding investments in the future and help you stay on track with your passive income goal.
Apart from the above two stocks, consider adding two more stocks from other sectors to diversify your portfolio and reduce downside risk.
The post Passive Income: How To Earn Nearly $500 Per Month In Your TFSA Portfolio appeared first on The Motley Fool Canada.
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