How Much Should You Invest to Earn $500 in Passive Income Every Month?

Investing a substantial sum will get you about $500 in dividends per month.

Andrew Button ❯

Andrew Button is a freelance financial writer with extensive experience writing about stocks, real estate and managed products. His portfolio consists mainly of blue chip dividend paying stocks and index funds. He has completed the Canadian Securities Course and passed the CFA Level 1 exam. Follow Andrew on Twitter: twitter.com/AJButton2

Published October 21, 2024 9:35 am EDT

Do you want to earn $500 in passive income each and every month?

If so, you have a worthy goal. However, it’s easier said than done. $500 per month is $6,000 per year. Realistically, getting to $6,000 in annual dividend income is going to take hundreds of thousands in savings. There are some very high yield assets out there, like PIMCO’s Dynamic Income Fund, that offer such dizzyingly high yields that they could produce $6,000 a year with only a few tens of thousands invested. However, such funds have lots of leverage and are therefore riskier than average. Also, not all stocks/funds pay out income monthly.

A few do, however; and some of them are pretty good investments. In this article I will explore two ways you can get $500 in passive income “per month.” The first is an extremely low-risk way to get a quarterly sum that “averages out” to $500 per month, the second is a slightly riskier way to get exactly $500 each and every month.

Low risk tolerance and payouts ‘averaging’ $500 per month: $211,864

The easiest and least risky way to get $500 “per month” is to abandon the monthly-pay requirement and invest in broad market index funds. If you invest $206,896 in a typical TSX Composite ETF you should get $6,000 worth of dividends per year, a sum that averages out to $500 per month. The payout schedule with such ETFs is actually quarterly rather than monthly, but the quarterly sum if you invest $206,896 in a typical one is $1,500. So, you could say that $500 in future dividends accrues monthly.

The iShares S&P/TSX Capped Composite ETF (TSX:XIC) is a Canadian broad market index fund built on the TSX Composite, the 240 largest publicly traded Canadian stocks. The fund holds 224 of the 240 TSX stocks, so it is fairly representative of the index it tracks.

XIC’s trailing dividend yield is 2.8%, which means you’d need to invest $211,864 in it to get $1,500 in quarterly dividends from it (equivalent to a $500 monthly average payout). Here’s how the math on that works: ($211,864 / $39.55 = 5,357 shares)

COMPANY	RECENT PRICE	NUMBER OF SHARES	DIVIDEND	TOTAL PAYOUT
iShares S&P/TSX Capped Composite Index Fund	$39.55	5,357	$1.12 per year ($0.28 per quarter)	$5,999.84 per year ($1,499 per quarter)

As you can see, you can get quite a bit of passive income from a broad market fund like XIC. The fund is also cheap, with a 0.04% management expense ratio and high liquidity, making it a great choice for most Canadian investors.

Higher risk tolerance and payouts exactly every month: $125,000

The BMO Monthly Income ETF (TSX:ZMI) is a monthly pay ETF offered by the Bank of Montreal. It invests in all of BMO’s higher-yielding ETFs, which gives it more diversification than the average high-yield fund. This makes the fund relatively low risk compared with its peers, though it is still riskier than a broad market fund. It has a 4.8% yield and a 0.2% management expense ratio. To get $500 per month from ZMI, you’d need to invest $125,000: ($125,000 / $17.65 = 7,082 shares)