Yahoo Finance How to Earn $500 in Passive Income With Just $10,000 in Savings
Written by Aditya Raghunath at The Motley Fool Canada
Investors need to look at different ways to create a steady stream of passive income, which, in turn, will help them achieve financial independence at an accelerated pace. We’ll look at three different ways you can earn more than $500 in annual passive income with just $10,000 in savings.
Invest in GICs
A Guaranteed Investment Certificate, or GIC, is a fixed-income instrument that has gained popularity in the last two years due to rising interest rates. Here, you deposit a certain sum of money with a bank or financial institution and earn interest on these deposits. Higher interest rates have allowed investors to benefit from a tasty yield of 5%, much higher than the current inflation rate.
So, an investment of $2,000 in GICs can help you earn $100 in annual interest payments. GICs are ideal for investors closer to retirement or those with a lower-risk profile. It also makes sense to invest in this asset class if you are looking for short-term investment periods.
Invest in blue-chip dividend stocks
Investors can consider allocating around 20% or $2,000 towards blue-chip dividend stocks such as Enbridge (TSX:ENB). A diversified energy infrastructure giant, Enbridge’s predictable cash flows allow the company to pay shareholders an annual dividend of $3.66 per share, translating to a forward yield of more than 7%.
In the last 29 years, Enbridge has increased these payouts by 10% annually, significantly enhancing the effective yield at cost. With a payout ratio of less than 70%, the TSX dividend stock continues to reinvest in growth projects and target accretive acquisitions, both of which should drive future cash flows higher and support dividend hikes going forward.
More than 80% of the company’s cash flows are tied to long-term contracts and indexed to inflation, making it immune to commodity prices such as natural gas or crude oil. Investors should identify other such dividend stocks and further diversify their dividend portfolio.
Invest in dividend-paying ETFs
Canadian investors can also consider holding dividend-paying ETFs (exchange-traded funds) such as the iShares Core MSCI Canadian Quality Dividend Index ETF (TSX:XDIV), which offers a yield of 5%. The ETF is a low-cost portfolio of TSX stocks with above-average dividend yields and steady or rising dividends. Basically, the ETF selects companies with strong balance sheets and lower volatile earnings.
In the last five years, the ETF has returned more than 10% annually to shareholders and currently offers you a tasty yield of 4.5%.
With a management fee of 0.10% and an expense ratio of 0.11%, the XDIV ETF has more than $1.24 billion in total assets. The ETF provides you with exposure to 19 companies across sectors such as financial services, energy utilities, and consumer discretionary.
The Foolish takeaway
A 30-year-old Canadian investor can allocate $2,000 to GICs, $2,000 to dividend stocks, and the rest to diversified dividend ETFs, which lowers overall risk. With an average yield of 5%, investors are positioned to earn $500 in passive income with just $10,000 in savings. The allocation to these asset classes might change based on factors such as age, investment horizon, and risk appetite.
The post How to Earn $500 in Passive Income With Just $10,000 in Savings appeared first on The Motley Fool Canada.
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More reading
Can You Guess the 10 Most Popular Canadian Stocks? (If You Own Them, You Might Be Losing Out.)
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Fool contributor Aditya Raghunath has positions in Enbridge. The Motley Fool recommends Enbridge. The Motley Fool has a disclosure policy.
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