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Want Passive Income? You’re Likely Doing it Wrong

investment research
Image source: Getty Images

Written by Amy Legate-Wolfe at The Motley Fool Canada

Yep, it’s true. Many investors continue to look at passive income all wrong. There are multiple ways, actually. That’s why today we’re going to go over two of the mistakes investors are likely making when it comes to passive income. What’s more, we will look at an easy and lucrative way to fix it.

It is not a side hustle

First off, side hustles have become incredibly popular as people the world over look for extra cash. These side hustles might include turning your passion project into an income stream. It could be driving around an Uber on your free evenings and weekends.

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News flash. You’re not achieving a side hustle through these methods, no matter how much you enjoy them. No, what you have, my friend, is a part-time job. That is definitely not a passive income stream.

The key word here is “hustle.” Passive income you do not hustle for. The exact opposite. You should be making money even if you’re having a nap or on vacation. It’s passive. Therefore, a side hustle is certainly not a passive income stream. And, in fact, it could be putting your day job at risk if you’re tired and focusing on answering clients. So don’t consider it an easy way to make money. It’s not.

It is not just dividend income

Now, if you’re just focusing on investments during this bear market and staying away from side hustles, there’s another problem. Many of us are looking for extra cash flow and consider dividend income the best way to create passive income.

Sure, that’s true, dividend income is passive income. However, it’s not fixed income. If you’re looking for guaranteed cash flow, you want a guaranteed income certificate (GIC). And granted, these are great right now! Many average 5% on a five-year term and can be a great addition to any portfolio.

But when it comes to dividend stocks, look far beyond the dividend yield. That yield could be cut in the blink of an eye, especially if the company is losing money on its share price. Which is why there are two ways to calculate your true passive income.

Consider dividends and returns

To figure out the best passive income stock, you’re going to need to look at both dividends and returns. A high yield is great until it gets cut. Returns are great, unless they keep falling. Which is why you want to look for a stock that’s trading down, has a high dividend, and is practically guaranteed to bounce back.

Take Canadian banks. Here in Canada we enjoy an oligopoly of banking institutions. While this leads to lower competition, it leads to higher provisions for loan losses. That helps during these downturns as these banks can recover quickly, including housing and Canadian-market-focused Canadian Imperial Bank of Commerce (TSX:CM).

CIBC stock is therefore perhaps the best deal right now. If you were to take just $5,000 to create passive income, consider that the stock should climb back to 52-week highs within a year of hitting 52-week lows. How do I know? It has done this again and again over the years. So, here is what could happen should you buy today and hit highs once more.

COMPANY

RECENT PRICE

NUMBER OF SHARES

DIVIDEND

TOTAL PAYOUT

FREQUENCY

PORTFOLIO TOTAL

CM – now

$52

96

$3.48

$334.08

quarterly

$5,000

CM – highs

$65

96

$3.48

$334.08

quarterly

$6,240

Now you have passive income through dividends of $334.08, plus returns of $1,240. That’s total passive income of $1,574.08! So don’t make the mistake of buying just for dividends or working yourself ragged. Instead, consider all the passive income that can come your way when making investment choices.

The post Want Passive Income? You’re Likely Doing it Wrong appeared first on The Motley Fool Canada.

Should You Invest $1,000 In CIBC?

Before you consider CIBC, you'll want to hear this.

Our market-beating analyst team just revealed what they believe are the 5 best stocks for investors to buy in October 2023... and CIBC wasn't on the list.

The online investing service they've run for nearly a decade, Motley Fool Stock Advisor Canada, is beating the TSX by 25 percentage points. And right now, they think there are 5 stocks that are better buys.

See the 5 Stocks * Returns as of 10/10/23

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Fool contributor Amy Legate-Wolfe has positions in Canadian Imperial Bank Of Commerce. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

2023