Yahoo Finance 1 Index Fund That Can Produce $2,800 a Year in Passive Income
Written by Andrew Button at The Motley Fool Canada
Did you know that you can generate $2,800 per year in tax-free passive income in a Tax-Free Savings Account (TFSA)?
It’s true!
Technically, you can get much more than that in TFSA income. Invested for a 10% yield, the $88,000 in contribution room that Canadians aged 32 and older have amassed can produce $8,800 per year in passive income — not that trying for that level of passive income is a good idea, mind you. A 10% yield is extraordinarily high by today’s standard, which means that the investments carrying such yields are very risky. Unless you are very experienced, you are probably better off not wading into the high-yield space.
The good news is that $2,800 in tax-free passive income in a TFSA is achievable with highly diversified “newbie-friendly” investments. Heck, with the yields on Guaranteed Investment Certificates (GICs) these days, you can even invest a maxed-out $88,000 TFSA in a humble GIC and collect $4,400 in interest income a year from now. That’s a perfectly viable option to consider and within the $100,000 Canada Deposit Insurance Corporation insurance limit.
In other words, the principal in such an investment is risk-free! However, this is a relatively “hands-on” investment strategy where you need to re-invest the GIC every year to keep the income coming in, which is why we need to look at something that offers recurring passive income.
A TSX composite index fund
An asset that can get you $2,800 in passive income per year tax-free in a TFSA is a Canadian broad market index fund. Such funds track either the TSX Composite or the TSX 60 — the largest stocks in both types of funds are the same, and their performance is similar. The TSX Composite funds tend to have lower fees, while the TSX 60 funds often have better price results. TSX Composite funds have more diversification, which is what academic finance textbooks say makes an investment desirable.
The iShares S&P/TSX Capped Composite Index Fund (TSX:XIC) is a good example of a diversified TSX index fund that can produce $2,800 per year in passive income with $88,000 invested. It is a “broad market” index fund, meaning that it invests in an entire market — in this case, publicly traded Canadian companies.
XIC holds shares in 229 such companies, so it’s plenty diversified. It also has an ultra-low 0.04% management fee, so, as an investor, you do not lose much of your returns to the fund’s managers. It’s a pretty good fund. And with a 3.2% yield, it should produce $2,800 in dividend income each year with dividends reinvested.
Here’s the math on that
The math on generating $2,800 per year in passive with XIC is shown in the table below:
COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY |
IShares TSX ETF | $32.45 | 2,711 | $0.2563 | $2,779.3 | Quarterly |
As you can see, 2,711 shares get us to $2,779, which rounds to $2,800. This is a pretty good result for only $88,000. And because XIC is a diversified, broad market index fund, you can justify holding a very large percentage of your portfolio in it, because it has diversification under the hood. Essentially, you are buying a portfolio of 250 stocks, not ‘a stock.’ This fund is really a whole portfolio in itself!
It just goes to show that you don’t need to risk it all with high-yield stocks to generate substantial TFSA income — even a garden-variety index fund will do the trick.
The post 1 Index Fund That Can Produce $2,800 a Year in Passive Income appeared first on The Motley Fool Canada.
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Fool contributor Andrew Button has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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