Building a passive-income stream is a proven strategy to accelerate your retirement plans and grow your wealth over time. But in most cases, you would need a ton of capital to begin a passive-income stream.
For instance, the most popular way to build a recurring income stream is to purchase real estate and rent it out to tenants. However, the average cost of a house in Toronto is over $1.1 million, while the average rental yield is less than 4%. It means you would earn around $40,000 in annual rental on an investment that costs you more than $1 million.
Moreover, a majority of homeowners will have to fund the purchase with a sizeable amount of debt. In the last two years, rising interest rates have significantly increased the cost of debt in the process. Additionally, you have to account for expenses such as maintenance, taxes, and periods of vacancy, which reduces your overall returns.
Instead, a low-cost way to create a reliable stream of passive income is to invest in dividend-paying exchange-traded funds (ETFs) that have a monthly payout. One such ETF trading on the TSX is iShares Core MSCI Canadian Quality Dividend Index ETF (TSX:XDIV).
Benefits of investing in ETFs
Before diving deeper into the XDIV ETF, let’s see why investing in these financial instruments is a no-brainer.
Investing in low-cost ETFs is the best way to gain exposure to the stock market. Why? Because consistently picking individual stocks that can outpace the broader markets is difficult, time-consuming, and requires a ton of expertise.
Typically, ETFs hold a basket of stocks across multiple sectors which lowers investment risk significantly. Further, similar to stocks, ETFs are traded on an exchange, making them highly liquid in nature.
An overview of the XDIV ETF
iShares Core MSCI Canadian Quality Dividend Index ETF provides investors with exposure to a portfolio of top TSX stocks with above-average dividend yields and steady or increasing dividends.
Its rules-based methodology analyses stocks on the basis of dividend growth, yield, and payout ratio. Moreover, the ETF has a monthly payout ratio, making it ideal for income-seeking investors.
Introduced in July 2017, the XDIV ETF has returned 29% to shareholders since its launch. However, after adjusting for dividends, total returns are closer to 73%. In the last five years, the ETF has returned 9.9% annually, resulting in inflation-beating gains for investors.
With $1.1 billion in total assets under management, XDIV ETF has a monthly payout ratio of $0.13 per share, translating to a forward yield of 6%, which is quite attractive. These payouts have risen from $0.07 per share in 2017, enhancing the yield at cost in the last seven years.
The ETF has an exposure of 41.5% to the financial services sector, followed by the energy sector at 24% and utilities at 17%.
A $25,000 investment in XDIV ETF will help you earn $1,500 in annual dividend income. This payout will double in the next 10 years if dividends are raised by 7% annually.
