TF:CC - How Much Do You Need to Invest to Quit Work and Live Off Passive Income?

2023-05-07 09:00:00 ET

Roughly 38% of Ontarians are regular players of the lottery, according to a player fact sheet from the Ontario Lottery and Gaming Corporation (OLG). It is a safe bet that a good portion of lottery players dream of winning the big one and walking off into the sunset to leave their regular work life behind. Today, I want to explore how you can achieve that goal without having to beat astronomical odds. Instead, we are going to look at how passive income can work to set you on your way to post-work bliss.

The average annual salary in Canada was $59,300 in 2021. Cost of living varies considerably across Canada. Major metropolitan areas like Toronto demand higher salaries to keep up with a higher cost of living. However, we are going to simplify things for our readers today and target a $60,000 annual passive income payout.

How much will you need to quit work today?

We are targeting an annual salary of $60,000. That means we will need to churn out $5,000 in passive income per month. The most dependable Canadian dividend stocks will net you yields in the 3-5% range. For example, the three largest TSX stocks by market cap, Royal Bank , TD Bank , and Enbridge , offer dividend yields of 3.9%, 4.6%, and 6.6%, respectively, at the time of this writing.

For our hypothetical early retirement, let’s assume we are going to be targeting these dependable blue-chip stocks . Our trio’s average gives us a 5% dividend yield. We would need a whopping $1.2 million to generate $60,000 in annual income from the dividends alone. However, you could pursue a more aggressive passive-income strategy that targets higher-yield equities.

The plan to build your passive-income nest egg

Before we dive into our passive-income beasts, it is worth reviewing a long-term savings plan that will help us build up a viable cash pool. So, let’s put a dividend-reinvestment plan (DRIP) to work.

Let’s assume that we have $60,000 already saved up at the age of 30. We are going to snag 731 shares of TD Bank in our Tax-Free Savings Account (TFSA) for just under our principal. Moreover, we will seek to contribute $5,000 annually to that portfolio. We will assume a conservative annual dividend increase of 3% and an annual share price increase of 5% over 25 years. Using this framework, our DRIP would leave us with $891,432.09 at the end of the forecast period.

These monster passive-income stocks could help you reach a lofty goal

If our goal is to retire early at 55, we will need to target riskier, high-yield dividend stocks to meet our annual income goal of $60,000. We are going to be splitting our $891,432.09 three ways at $297,144.03.

Timbercreek Financial ( TSX:TF ) is a Toronto-based mortgage investment company that closed at $7.78 per share on Monday, May 1. We can snatch up 38,193 shares of Timbercreek for a purchase price of $297,141.54. This stock offers a monthly dividend of $0.058 per share. That represents a massive 8.8% yield. This investment will allow us to generate monthly passive income of $2,215.19.

Slate Grocery REIT ( TSX:SGR.UN ) is a Toronto-based real estate investment trust (REIT) that owns and operates grocery retailers in the United States. It closed at $13.21 on May 1. We can buy 22,493 shares of this REIT for a grand total of $297,132.53. Slate Grocery REIT offers a monthly dividend of $0.072. That means we can churn out monthly passive income of $1,619.49.

TransAlta Renewables ( TSX:RNW ) is a Calgary-based renewable energy stock that last closed at $12.72. We can snatch up 23,360 shares of this stock for a purchase price of $297,139.20. This stock offers a monthly distribution of $0.078 per share, representing a 7.3% yield. Our purchase will allow us to generate monthly passive income of $1,822.08.

These three monster investments will allow us to generate annual passive income of $67,881.12. That far exceeds the goal we originally set out. It is worth noting that investors should seek to diversify their retirement portfolios, especially when we are dealing with investments this high. However, this is a worthwhile example for those exploring passive-income alternatives.

The post How Much Do You Need to Invest to Quit Work and Live Off Passive Income? appeared first on The Motley Fool Canada .

Fool contributor Ambrose O'Callaghan has positions in Toronto-Dominion Bank. The Motley Fool recommends Enbridge. The Motley Fool has a disclosure policy .

2023