The stock market is a great place to build a passive-income stream. You can build a diversified portfolio of stocks from a wide mix of asset classes and industries.
Unlike other passive-income alternatives (like real estate or side hustles), there is no management or labour required to invest. Of course, some effort/time is required to analyze the companies you wish to buy, but that is the extent of the work required.
Collect income and capital returns from dividend stocks
If you pick companies with quality assets, great services, and smart executives, you can stand to earn both passive income and capital gain returns.
So, say you want to earn an average of $500 of passive income per month from owning dividend stocks. How much cash do you need to invest? Well, that really depends on the dividend yield you expect.
How much cash do you need to earn $6,000/year of passive income?
If you divide your required annual income stream (in this case, $6,000) by your expected average yield, you can calculate how much cash you would need to invest. The type of yield you expect to earn often relates to the amount of risk you are willing to take. Often, as a dividend yield rises, so too does the risk.
Stocks with large dividend yields (like over 8%) often have significant business challenges. The market fears these challenges, so it prices the stock down and raises the yield. Unless you have a special edge on the specific company, it is best to avoid these types of high-dividend stocks.
Look for a yield between 3% and 6%
Stocks in the 3-6% range offer a lower level of risk and a better prospect that the dividend will be sustained (or even grow). If you average a 3% portfolio yield, you will need $200,000 to earn $500 per month.
If you average a 6% portfolio yield, you will need half that amount ($100,000) invested to earn $500 per month. Chances are you would likely end up somewhere in the middle with a yield of 4-5%. You would need between $120,000 and $150,000 invested.
If you are looking for some passive-income stocks in that yield range, these ideas are interesting.
A solid real estate stock for passive income
Granite Real Estate Investment Trust (TSX:GRT.UN) stock earns a 4.8% yield today. Granite owns large e-commerce, logistics, and manufacturing properties across Canada, the United States, and Europe. It has infrastructure-like assets with long-term leases (plus six years on average), solid 95% occupancy, and high-grade tenants.
The company has delivered strong, high single-digit cash flow per share growth in the past few years. It has a top management team and a well-managed, low-debt balance sheet.
Its distribution has increased for 14 consecutive years. It's a safe bet for passive income. It also helps that the stock is cheap today.
An infrastructure stock with a nice yield
Pembina Pipeline (TSX:PPL) stock yields 5.3%. It operates a diversified energy infrastructure business across Western Canada.
Pembina provides energy producers with essential processing, transport, egress, and export services. In many instances, it is the only way producers can get their products to market.
As a result, a large mix of its business is on long-term contracts. This business has proven resilient, even through the worst energy downturns. Even when oil was temporarily priced below zero, Pembina continued to pay its dividend.
The company has a strong balance sheet and long-term growth prospects. Strong free cash flow generation has supported dividend growth in the past few years.