Yahoo Finance Passive Income: How to Make $500 Per Month Tax Free
Written by Kay Ng at The Motley Fool Canada
Investors who were heavy in growth stocks in 2022 witnessed meaningful declines in their wealth, as central banks in developed countries, including the Bank of Canada cut policy interest rates to curb high inflation. The interest rate-hike cycle triggered lower valuations and a selloff in stocks. Generally, the ones hit the hardest were growth stocks.
Given the drama we experience in the markets all the time, any investor can sleep better at night by focusing at least a portion of their diversified investment portfolios in passive-income generation.
Dividend stocks pay out cash distributions monthly, quarterly, semi-annually, or annually. Therefore, investors should figure out the annual payout and then work backwards on calculating the monthly income. In other words, to earn $500 per month in passive income, investors are looking for annual cash distributions of $6,000 per year. To earn tax-free income, investing in the Tax Free Savings Account (TFSA) is the way to go.
The most conservative investors who want 100% protection in their capital may be inclined to lock their money in Guaranteed Investment Certificates (GICs). On a 5% interest rate, a $120,000 investment is required to make $6,000 of passive income a year.
Assuming you never contributed to a TFSA before, you could have as much as $88,000 of tax-free contribution room this year. This much contribution requires a yield of about 6.82% to earn $6,000 of annual passive income.
It would not be wise to focus purely on income generation for your investments. That said, here are some high yields, close to the roughly 6.8% target, that appear to be fairly safe. On an equal-weight dividend portfolio across Bank of Nova Scotia (TSX:BNS), Enbridge, and Power Corp., the average yield is 6.58% at writing. So, a total investment of about $91,116 is required to make $500 per month in passive income.
The table below displays the number of shares you need to buy in each stock to make $2,000 of annual passive income from each. The “DIVIDEND” column shows the quarterly payout per share.
COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY |
BNS | $65.93 | 486 | $1.03 | $2,000 | 4 |
ENB | $52.54 | 564 | $0.887 | $2,000 | 4 |
POW | $36.36 | 953 | $0.525 | $2,000 | 4 |
Even if you’re only investing $88,000 across the stocks today, it’s only a matter of time before you’d earn passive income of $500/month. First, you will have more tax-free room to invest in future years. Additionally, these stocks also tend to increase their dividends over time. For reference, their average three-year dividend-growth rate is about 5.9%. In fact, assuming this dividend-growth rate continues, you’d earn $6,133 of passive income from an $88,000 initial portfolio in a year.
BNS stock
Bank of Nova Scotia stock provides the highest yield among the Big Six Canadian banks. You’ll also notice that its valuation is depressed versus the group. At the recent quotation, it trades at about 8.2 times earnings.
Other than expecting a recession in Canada this year, the bank’s international operations hasn’t worked well for the last few years. For example, it witnessed a greater earnings decline during the 2020 pandemic year than most of its big bank peers. This suggests that the international operations, while having the potential for higher growth, also poses greater risks.
Bank of Nova Scotia stock’s payout ratio remains sustainable at about 60% of earnings. The investing community is also waiting for the new chief executive officer to prove himself in leading the bank to be a better performer.
Investor takeaway
Among the three dividend stocks, Enbridge and Bank of Nova Scotia appear to be better valued with analysts believing they trade at discounts of about 10%. All three are solid stocks with relatively high yields and tendency to increase dividends. To earn current passive income, you can start building a diversified portfolio of dividend stocks by exploring these stocks first.
The post Passive Income: How to Make $500 Per Month Tax Free appeared first on The Motley Fool Canada.
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Fool contributor Kay Ng has positions in Bank Of Nova Scotia. The Motley Fool recommends Bank Of Nova Scotia and Enbridge. The Motley Fool has a disclosure policy.
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