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How to Create a Passive Income Portfolio

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To create a passive income portfolio, you can invest in bonds or stocks that generate interest or dividend income without you having to lift a finger. I prefer to invest in stocks which have outperformed bonds in the long run.

I also like the concept of investing in stocks because I’m owning stakes in businesses and benefiting from their profits (although I also take on their risks). This is markedly different from purchasing bonds for which you’re lending your money to governments or corporations for interests in return.

In fact, dividend investing is my favorite way to generate passive income. There are so many safe dividend stocks to choose from. Even in a booming stock market like today, you can still find quality businesses at good valuations.

Here’s how to create a passive dividend income portfolio:

  • Buy stocks that offer safe dividends at good valuations
  • Diversify but don’t di-worsify
  • Aim for a low-maintenance portfolio that’s replicable, scalable, and can be largely automated
grow a money tree

Buy stocks that offer safe dividends

The U.S. and Canadian stock markets offer yields of 1.8% and 2.8%, respectively. There are plenty of safe dividend stocks that offer higher yields of about 3-6%.

However, typically, the higher the yield of a stock, the slower its dividend growth will be. (Sometimes, high yielders don’t increase their dividends.) Similarly, low yield stocks tend to increase their dividends faster. Typically, dividend growth stocks are safer and better than stocks that simply maintain their dividends.

Buy stocks at good valuations to protect your invested capital and maximize your gains.

Here are a few examples.

A high yield example

NorthWest Healthcare Properties REIT (TSX:NWH.UN) owns a high quality portfolio of medical office buildings and hospital properties in major markets in Canada, Brazil, Germany, The Netherlands, Australia, and New Zealand.

The healthcare REIT generates stable cash flows from having a high occupancy of about 96% and a weighted average lease expiry of 13 years. Additionally, it gets organic growth from having more than 70% of its net operating income indexed to inflation. It also has CAD$370 million projects in its development pipeline that’ll also add to growth.

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Do Quality Shares Lead to Lower Returns for Your Portfolio?

Managing your own stock portfolio is not easy. One of the many important decisions is choosing between quality and returns. Is there a cost in investing in high-quality shares? Could buying them lead to lower returns?

There’s no simple answer. However, your rate of return on a stock depends largely on the valuation you paid and the growth rate of the company. Besides, there are other considerations outside of aiming for high returns.

Let’s explore the answers with examples, including Microsoft Corporation (NASDAQ:MSFT), The Coca-Cola Co (NYSE:KO).

Quality companies tend to trade at premiums

Some say you can get quality and returns too. The rationale being that when you buy quality companies, their steadily rising earnings will lead to steadily rising share prices. However, if you overpay for them, the expected returns will likely be unsatisfactory. Read More

Growth Or Dividends: What Should Young Investors Focus On?

It’s not as simple as just focusing on dividend or growth investing. What are the fundamentals of the business underlying a stock? It’s important not to overpay for a business. For dividend investing, there are ways to improve the safety of your dividend.

Dividend-paying multi-baggers that are priced for purchase today will be used as examples, including one Canadian Basic Materials company and one U.S. company.

I came across an article written by Financial Samurai (or Sam), who worked in the finance industry for 13 years. The article was titled: Why It’s Better To Invest In Growth Stocks Over Dividend Stocks For Younger Investors.

It takes a lot of capital to generate meaningful income

Sam starts off saying: “Even if you have a $500,000 dividend stock portfolio yielding 3% that’s only $15,000 a year.”

Indeed, there are different ways to double your money. It’s a matter of if you want to focus more on income or growth.

Young people are better off focusing on growth stocks

Sam opines that:

“If you’re relatively young, say under 40 years old, investing the majority of your equity exposure in dividend yielding stocks is a suboptimal investment strategy.”

He continues that:

“Out of the few multi-bagger return stocks I’ve had over the past 16 years, none of them have been dividend stocks.”

Although none of the multi-baggers he owned were dividend stocks, there are always examples if you look for them.

Growth stocks can also pay dividends

Stella-Jones Inc. (TSX:SJ) started paying a growing dividend in 2005. Since then, the stock has appreciated 2,800% – a dividend-paying 29-bagger! Here’s the stock analysis on Stella-Jones. Read More