The most traditional form of passive income was renting out your property. But today, many dividend stocks can help you build passive income for retirement without investing over half a million, which you need to buy a property. While dividend stocks come with industry risks, the costs and yield far outweigh the risks.
The efforts of earning passive income the traditional way
If you rent out a residential property, you can get 2.5% of the property value as rent. This yield comes with risks — tenant defaulting or apartment remaining vacant — and costs — maintenance, property tax, and income tax on rent received. Moreover, you will also have to spend on renovation every few years.
Another way to earn passive income is by lending to people and earning interest. However, lending brings with it credit risk. You need a mechanism to ensure the borrower repays the loan with interest and you have a system in place to recover the loan. The best way to earn money in lending is through diversification.
You can use these traditional ways to earn passive income but with less risk, lower investment, and a cost-efficient manner. Moreover, you can also get tax benefits if you invest smartly.
Two effortless ways for Canadians to earn passive income
Invest in REITs
Real estate investment trusts (REITs) are an effortless way of earning rental income as REITs buy and lease properties and pass on a significant portion of their rent to unitholders. They do so to enjoy the benefit of not paying taxes.
CT REIT (TSX:CRT.UN) is Canadian Tire’s REIT that buys stores from the retailer, develops and maintains them and leases them back to the retailer. Why would Canadian Tire sell the store to its REITs? It would do so to secure the property from creditors and also claim rent expense. The rent Canadian Tire deducts from its operating expense is income for CT REIT, which it transfers to unitholders. The rental income is taxable in the hands of unitholders.
CT REIT enjoys the first right to buy Canadian Tire stores. It increases its rent by acquiring new properties or intensifying existing ones. The REIT increases rent by 1.5% and dividends by 3% annually. If you buy 1,000 units for $16,000, you can get $930 in annual passive income, a 5.8% yield.
You can make it tax-free by buying the REIT’s units through a Tax-Free Savings Account (TFSA). You can also compound your passive income by opting for a dividend-reinvestment plan (DRIP). And if you need immediate cash, you can stop DRIP and take dividend payouts or sell the units on the TSX.
You can even build a portfolio of REITs, like residential, industrial, and hospital REITs.
Invest in lender stocks
The second effortless way to earn passive income is by investing in the sub-prime lender goeasy (TSX:GSY). goeasy provides short-term, small loans to people with lower credit ratings and charges a higher interest rate. The weighted average interest rate of its loan portfolio was 30.3%, with a net charge-off rate (credit risk) of 8.9% in 2023.
Over the years, goeasy has increased its loan portfolio by offering different types of loans (car, retail, home, personal) to the same customer and adding new customers. This has increased its adjusted operating margin from 27.7% in 2019 to 39.3% in 2023. It has also increased its free cash flow at a compounded annual growth rate (CAGR) of 33%.
goeasy shared its profits with shareholders by increasing its dividend per share at a CAGR of 33% between FY19 and 24. So, if you bought 1,000 shares of goeasy for $39,000 in 2019, your annual passive income would have increased to $4,680 in 2024 from $1,550 in 2019.
You can build a portfolio of lender stocks to diversify your risk.
