Welcome to my article on how to build passive income streams. Building passive income streams has been a major goal of mine for years. Since I started my first “real” job 7 years ago, I’ve been through 1 merger and 2 rounds of downsizing. This experience has shaped my views on the importance of achieving financial freedom. My vision for achieving financial freedom involves a combination of being debt-free and having a sufficient amount of passive income to not only cover my expenses, but to live a comfortable lifestyle.
It goes without saying that if your job is your sole source of income, then you are financially vulnerable. I believe that financial independence means financial security in that, ideally, no 1 source of income has a disproportionate representation in your total income picture. My goal is to diversify my income over time by setting up and growing my passive income streams.
Naturally, someone just starting out will be totally reliant on income from his/her job, but as they save and invest some of their earnings they will begin to build up other sources of income. Establishing and growing other income sources takes time. That’s why the sooner you start, the more you’ll be able to leverage the power of compounding. Building passive income is the Holy Grail because, while it requires some up-front work, once it’s set up you don’t have to keep working for it.
Passive income comes from the assets that you own. It can be the monthly interest you receive in your savings account, dividends from stocks, distributions from mutual funds or exchange-traded funds (ETFs), royalties from your intellectual property, or income from a rental property (although this is not quite passive income as I’m sure many landlords will attest to). The point is that when you diversify your assets you also diversify your income, which makes for a much more stable and secure financial future.
How to Set Up Passive Income Streams
This is the easiest one to set up since most people already have a savings account. If you don’t have one already, open up a high interest savings account and start collecting monthly interest. If you want to collect more interest income you can always purchase a guaranteed investment certificate (GIC), bonds or even a bond mutual fund. The interest is 2 to 3 times more than the 1% or so currently being paid out at most financial institutions on their savings accounts.
For dividend income you need to own stocks that pay dividends. The beauty of dividend income is that it is taxed much more favorably than interest which is taxed at your marginal rate. What’s also nice about dividends is that if you invest in high quality companies you’ll see your income increase over time as they raise their dividend periodically. To acquire dividend income you must purchase shares in dividend paying companies either through a discount broker or by obtaining a share certificate and setting up a Dividend Reinvestment Plan (DRIP) through a company’s transfer agent.
Buy mutual funds or exchange-traded funds (ETFs) that pay regular distributions on either a quarterly or monthly basis. For ETFs, you can do so in your discount brokerage account and, for mutual funds, through the investment services arm at a major financial institution. Make sure they are low-cost index funds like TD e-series funds as some mutual funds charge extremely high fees.
There are many ETFs out there that offer monthly distributions. Here are just a few:
iShares Canadian Financial Monthly Income ETF (FIE)
iShares S&P/TSX Canadian Preferred Share Index ETF (CPD)
iShares S&P/TSX Capped REIT Index ETF (XRE)
iShares S&P/TSX Canadian Dividend Aristocrats Index ETF (CDZ)
BMO S&P/TSX Laddered Preferred Share Index ETF (ZPR)
BMO Equal Weight REITs Index ETF (ZRE)
BMO Monthly Income ETF (ZMI)
These days it seems like you can rent just about anything – parking spaces, garage space, rooms, apartments, residential and commercial space, farmland etc. Buy a rental property or other piece of real estate and rent it out. There is more money to be made in the multi-unit segment of the market and this also allows for a bit of a cushion in case there are some vacancies. The rental business isn’t quite passive income though, unless you hire a property manager but this will eat into your profits. All things considered though, owning rental property has been a very successful strategy for building wealth and creating a source of passive income.
If being a landlord is not your thing, you may want to consider investing in real-estate investment trusts or REITs. REITs are simply trusts that invest directly in real estate. They own:
- shopping malls (ie. RioCan REIT),
- office buildings (ie. Canadian REIT),
- industrial buildings (ie H&R REIT), and
- apartment buildings (ie. Boardwalk REIT).
Their units trade on the TSX so they are a highly liquid means of investing in real estate without all the headaches of being a landlord. You’ll also get income in the form of a distribution that is paid monthly. You can pick and choose which ones to invest in individually, or just buy a REIT index ETF like the XRE or ZRE.
Be creative and write a book or a song. Of course this requires a lot of up-front work but if it produces years of royalty income, it may prove to be well worth the effort. Publishing platforms like Amazon’s Kindle Direct Publishing make it easier than ever for authors to publish their work.
These are some ideas for building passive income streams. As I said at the outset it takes time to set them up and to grow their income into a significant amount of money, but it is well worth it. As it stands today, my passive income generates about $4,000/year, or roughly $333/month, and once my mortgage is paid off I expect to triple that amount in the next 2 years. To learn more about my passive income strategy or to see my dividend stock and ETF holdings check out my Dividend Income / Monthly Highlights page.
Check out my other Passive Income Articles:
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