Updated: Nov 14, 2022
Don't get me wrong, you won't get rich overnight. But if you are just starting out or have some experience investing, then today's video is for you. Today, I will be showing you how to make passive income in your sleep with $1000.
Today, I will be sharing with you 5 ways to make money passively and introduce some unique investment funds that may be new to you. So let's get started!
Passive Income Stream #1 - Dividend Stocks
You may have heard of Dividend Stocks, but how do they differ from regular stocks? I will give you a quick rundown as well as use a specific company as an example to show you what to look for when picking dividend stocks.
Just to make sure everyone is on the same page, investing in stocks essentially means that you become an owner of a company, but at a teeny percentage. By being an owner, and hence an investor, you would expect to see returns on your initial investment in two ways: through dividend payments and capital appreciation.
Dividends are declared by the company and paid out from the company's after-tax profits. Capital appreciation is when the stock price of the company goes up, and you get to profit by pocketing the difference between your initial investment and the increase in price.
Profitable does not mean dividends
Now, not all companies pay out dividends. A distinguishing factor among established tech companies is that even if they are profitable and have lots of cash, they choose not to pay out dividends but instead invest back into the company. For example, Google is a big company that we all know of and that is profitable. In fact, Google has cash and cash equivalents of $139.6 Billion and does not pay any dividends to its shareholders. However, these sort of stocks have other passive income potential such as capital appreciation.
What to look for in a Dividend Stock - Example
On the other hand, there are well-established companies that are known to pay out consistent dividends over many years and even several decades. Here in Canada, the energy sector is a big part of our economy. An example that I will be using is a well-known Canadian company, Enbridge. This company has been paying dividends for 67 years, with a compound annual growth rate of 10% over the last 27 years.
While the energy sector tends to be volatile, Enbridge claims they have a low-risk business model with long-term contracts and fixed fees, that result in predictable cash flows. The current dividend yield is 6% so if you invest $1000, you can expect to receive around $60 in dividends annually. Enbridge said it expects to place $10 billion of projects into service this year which will help it increase distributable cash flows between 5% and 7% through 2023. Keep in mind past distributions do not guarantee future dividends, but past distributions can be a decent indicator of future payouts. I'm also not recommending you to invest in Enbridge, this is simply an example in which I wanted to walk you through what to look for when you do research on stocks.
We just talked about the dividends, how about the share price? In the past 5 years, Enbridge's share price fluctuated from a low of $36 to $37, up to a current high of around $57. The all-time high price was back in 2015 of $65. So keep in mind that the price of the underlying stock price might fluctuate, but if you prioritize receiving consistent dividend amounts over a stretch of time, the price fluctuations of the stock might not be as big of a deal to you.
Choose an investment strategy that best suits you, whether that is investing in blue-chip companies known for consistent dividend payments or companies that have high growth potential for capital appreciation but don't necessarily pay dividends.
Miracle of Compounding
Now, let's see how passively you can let your income grow for you. Let's say you invested the $1000 in a dividend stock that produces a 6% yield. You are going to let your investment run on autopilot through a Dividend Reinvestment Plan aka DRIP with your brokerage. This means that even your dividend payments get reinvested in the same stock, which then increases your initial investment and dividend payments will be paid on the increased amount. You can see that by the end of 10 years, you will have more than an 80% return without lifting a finger!
Of course, this takes a few factors into consideration, such as your stock value and dividend yield not changing, and that you will be investing in a tax-free account such as a TFSA. However, if we can assume that stocks and dividend yields for bluechip companies will most likely increase over a long stretch of time, that will provide you with even better returns. To grow your portfolio even faster, contribute a little bit of money every month to see your returns grow exponentially.
Compounding not only works for stocks, but other investments like ETFs and Split Funds, which we will be talking about next.
Before we dive in, if you are looking for a brokerage in Canada to invest your money, I personally like to use Questrade to invest in for my TFSA and RRSP accounts. Questrade has low fees and advanced features such as DRIP. Use my link here to get $50 of free stock trades with a minimum of $1,000 portfolio.
Passive Income Stream #2 - ETFs & Split Funds
An exchange-traded fund, also known as an ETF, is a basket of securities that often tracks an index, such as the S&P/TSX in Canada or S&P 500 in the US. ETFs are a convenient way to invest since you can invest in hundreds of stocks by simply investing in one ETF. You also have the added benefit of diversifying your investments, since one ETF can hold stocks in various industries, and also have lower trading fees.
There are ETFs to suit different investor needs. There is an ETF that focuses just on high dividend paying companies, to ETFs that focus on trends such as Innovation companies, and even leveraged ETFs for investors with higher risk appetites who are willing to bet on a bear or bull market.
Split Share Funds
Another type of fund with a unique investment structure is a split fund. They typically hold a basket of high-quality dividend-paying companies and have two classes of shares - a preferred share and a Class A share.
A preferred share investor is a more conservative investor that receives a steady dividend and usually see their initial investment back at the end. They don't generally experience gains or losses and have priority over Class A shares when receiving their dividends.
On the other hand, the Class A Share takes part in potentially higher rewards for taking on higher risks. For one, Class A is subject to all the gains and losses in the underlying investments and receives only the excess dividends and income leftover in the portfolio. However, if the price of the underlying stocks goes up, due to this leveraged structure, that return will be magnified for Class A investors as they will also benefit from the gains attributable to the preferred shareholders.
For example, one split fund I'm investing in is the Dividend 15 Split Corp or DFN. I've bought when prices dipped at 100 shares for around $800, and received $10 in monthly dividends as a Class A shareholder. That's a 15% annualized yield!
Passive Income Stream #3 - Real Estate Investments Trusts
If you want to diversify your investments and want to delve into real estate without locking in a big chunk of change, you can look into Real Estate Investments Trusts aka REITs. Benefits of investing in REITs is that it can truly be passive, and you don't need to deal with tenants, leaky pipes, and broken laundry machines for repair.
You simply need to find a real estate market you want to invest in, and put down as little as $20 and be a real estate investor and receive dividends. REITs receive mostly rental income from their investments in residential buildings to commercial and retail properties. They are then obligated to distribute 90% of their taxable income to shareholders annually in the form of dividends.
An example of a REIT that invests in the Canadian real estate market is BMO's Equal Weight REITs Index ETF, ZRE, which doesn't invest in just one REIT but 24 REITs with around 4 to 5% holdings in each REIT. This provides added diversification to your portfolio by investing in different sectors, such as retail, residential, industrial, office, health care, etc.
For dividends, the annualized distribution yield is 4.34% (as of May 13, 2022) and you can even benefit from the appreciation in real estate in the long run.
Passive Income Stream #4 - Earning Interest on Crypto
Another form of diversification may be in crypto. I know that crypto is going through some turbulent times, but if you are simply holding crypto and riding out the storm, you can earn interest while hodling.
I personally hold some of my crypto in Nexo, where you can earn up to 16% on cryptos and 12% on stablecoins and fiat currency like the US dollar. I personally earn between 4.5 to 5.5% on my cryptos so I just set it and forget it. If you're interested, use my link here for $25 in BTC if you transfer $100.
Passive Income Stream #5 - GIC vs. HISA vs. Bonds
If you are looking for a relatively safe way to park your money as you save up for something in the short-term, the safest way to invest is through Guaranteed investment certificates (GICs), or even High-Interest Savings Account (HISA). For both of these investments, you don't need to worry about losing your principle but you also don't get that great of a return compared to the investments I previously mentioned.
Higher interest rates mean also means higher rates for your GIC and savings accounts. Apparently, there are some banks that are providing upwards of 3.45% for GICs. Though keep in mind whether GICs are redeemable or non-redeemable, which means that there are fixed terms and you might not get any interest if you withdraw your money early.
High-interest savings account can also be an option but returns will be measly. There are banks that are now providing more than 1%. If you are saving up for an emergency fund, it would be better than just letting your cash sit in your chequing account. Due to inflation, we can expect to see interest rates increase further this year, which also means higher returns on GICs and savings accounts.
Bonds can be considered safer investments but also don't provide that great of a yield. Per Bank of Canada, the yield are under 3%. Also keep in mind that there is often an inverse relationship between higher interest rates and bond yields - so as interest rates go up, you can also expect bond yields to go down.