How Much Cash Do You Need to Invest to Make $5,000 a Year?

Want to earn an extra $5,000 per year in passive income? Here’s how much cash you might need to put up to boost your annual income.

| More on:
analyze data

Image source: Getty Images

Earning an extra $5,000 of cash every year could go a long way. Consider that $5,000 spread across 12 months would average an extra $416 a month of passive income. With inflation continuing to soar, any extra income a month helps.

However, to earn that income, you will have to give up some cash to invest. So how much cash would you need to earn $5,000 a year? Unfortunately, there is no straight answer.

How much cash do you need to make a safe $5,000/annum?

It really depends on the yield you hope to earn. The higher the average portfolio dividend yield you earn, the lower the amount of cash you will have to put up. While it might be tempting to pack your portfolio with very high yielding dividend stocks, investors do need to be cautious.

Stocks with dividend yields over 7% tend to indicate a stock with serious risks. Either its business is in decline, facing serious headwinds, and/or its balance sheet is in peril. There tends to be a reason its yield is so elevated.

Be careful with overly large dividend yields

Periodically, this is not the case; the market has it wrong, and you can pick up a great bargain. However, often, big dividend yields should be avoided. What is the point of collecting a big dividend if it gets cut, or your stock substantially loses value over your hold period?

Most good quality dividend stocks yield in a range between 2% and 6%. If you divide the desired annual income by the required yield, you get the required amount of investment.

With a 2% average yield, you would need to invest $250,000 of cash to earn $5,000 per year. With a 6% yield, you would need to invest $83,333 to earn the same.

If you want some quality stocks that pay a nice dividend but also could provide capital growth, here are two to consider.

An energy stock with an attractive dividend yield

For a higher yielding stock, Topaz Energy (TSX:TPZ) looks attractive today. It yields 5.72%. Topaz has also steadily been increasing its dividend. Its quarterly dividend is up 60% since 2020.

Topaz operates a mix of energy infrastructure and energy royalty streaming assets. Its infrastructure assets provide steady, long-term contracted streams of cash flows. Its royalty assets earn a contracted proportion of energy production on the land it has rights to.

The royalty and energy infrastructure company has focused on very strong regions in Western Canada. As development activity increases, it gets natural organic income growth.

The company has very low operating costs, so it can afford to distribute most of its excess cash right back to shareholders. Its solid balance sheet should afford acquisition growth in the future as well.

A Canadian tech stock with a big cash balance

If you are looking for a good dividend and some potential growth, Enghouse Systems (TSX:ENGH) is intriguing at this point. This stock yields 3.5% today. It has compounded its annual dividend by a 17.8% rate over the past 10 years.

Enghouse operates a mix of communication and asset management technology businesses. The company has not performed well because the communication sector has seen declining demand and rising competition since 2021.

This company generates between $18 million and $30 million of excess cash every quarter. It has $250 million of cash on its balance sheet. It has been deploying that into tuck-in acquisitions, but it could make a substantial purchase in the coming quarters.

Once the software and services firm starts delivering growth again, this stock could enjoy a material valuation recovery. In the meantime, shareholders get a nice growing dividend stream.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Robin Brown has positions in Enghouse Systems. The Motley Fool has positions in and recommends Enghouse Systems. The Motley Fool recommends Topaz Energy. The Motley Fool has a disclosure policy.

More on Dividend Stocks

Canadian Dollars bills
Dividend Stocks

3 Monthly-Paying Dividend Stocks to Boost Your Passive Income

Given their healthy cash flows and high yields, these three monthly-paying dividend stocks could boost your passive income.

Read more »

Make a choice, path to success, sign
Dividend Stocks

The TFSA Blueprint to Generate $3,695.48 in Yearly Passive Income

The blueprint to generate yearly passive income in a TFSA is to maximize the contribution limits.

Read more »

hand stacks coins
Dividend Stocks

3 Ultra-High-Yield Dividend Stocks You Can Buy and Hold for a Decade

These three high-yield dividend stocks still have some work to do, but each are in steady areas that are only…

Read more »

senior man and woman stretch their legs on yoga mats outside
Dividend Stocks

TFSA: 2 Canadian Stocks to Buy and Hold Forever

Here are 2 TFSA-worthy Canadian stocks. Which one is a good buy for your TFSA today?

Read more »

calculate and analyze stock
Dividend Stocks

This 5.5% Dividend Stock Pays Cash Every Single Month!

This REIT may offer monthly dividends, but don't forget about the potential returns in the growth industry its involved with.

Read more »

Silver coins fall into a piggy bank.
Dividend Stocks

How to Use Your TFSA to Earn up to $6,000 Per Year in Tax-Free Passive Income

A high return doesn't mean you have to make a high investment -- or a risky one -- especially with…

Read more »

path road success business
Dividend Stocks

2 High-Yield Dividend Stocks to Buy Hand Over Fist and 1 to Avoid

High yields are great and all, but only if returns come with them. And while two of these might, another…

Read more »

Man holds Canadian dollars in differing amounts
Dividend Stocks

This 7% Dividend Stock Pays Cash Every Month

A high dividend yield isn't everything. But when it pays out each month and offers this stability, it's worth considering!

Read more »