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Written by Andrew Button at The Motley Fool Canada
Did you know you can build a bulletproof passive-income portfolio with just $10,000 invested?
You can achieve this safely using a “core and satellite” approach.
A “core and satellite portfolio” is a portfolio with defensive investments at its core and more speculative ones at smaller weighting. This kind of portfolio gives you a combination of safety and potential for “alpha” (meaning returns above-market returns).
You could build a core and satellite income portfolio with assets like iShares S&P/TSX Capped Composite Index Fund (TSX:XIC), Toronto Dominion Bank (TSX:TD) stock, and finally high yield funds like PIMCO’s Dynamic Income Fund (NYSE:PDI) on the “satellite side.”
The way such a portfolio might work is by holding the majority of the portfolio in the index fund, a minority of it in TD Bank stock, and an even smaller minority in the PDI fund. By doing this, you’d be decreasing the weighting as the yield on the asset increases, so that the majority of the portfolio is invested in a relatively “safe” index fund, and smaller amounts are invested in high-yield stocks and one ultra-high-yield fund.
Now, let’s explore each of these assets in detail and how they could come together in a high-yield portfolio.
iShares index fund
iShares S&P/TSX Capped Composite Index Fund is one of the most popular Canadian index funds. It includes about 240 stocks, giving it ample diversification. It has a lot of daily trading volume, which ensures that your trades in the exchange-traded fund (ETF) will be well executed.
Finally, the fund has a 2.95% dividend yield, meaning that it adds a little income to your portfolio. Now, you might be wondering how a 2.95% yield “adds passive income” to your portfolio when Guaranteed Investment Certificates (GICs) yield over 5% these days. It’s a fair question, which I’ll touch on in the next section.
TD Bank stock
TD Bank shares currently yield 5.05%, meaning that they beat most GICs. It has a 69% payout ratio, which means that it pays out 69% of its profit as dividends. With this ratio, lower is generally better, and TD’s ratio is on the higher end for Canadian banks, but the company’s earnings in the last few quarters were held back by non-recurring costs related to the bank’s terminated First Horizon deal and its acquisition of Cowen and part of Charles Schwab. Its payout ratio should come down once these charges are in the rearview mirror.
Over the last five years, TD has grown its dividend by about 7% per year. The current high-rate environment bodes well for the bank, which owns a lot of mortgages and other interest-bearing Canadian assets. If the coming wave of mortgage renewals does not lead to too many defaults, then TD’s margins should improve.