5 Ways to Earn Passive Income in Canada (2024)

In This Article

  • What is passive income?
  • The Top 5 Passive Income Ideas
  • 1. Dividend stocks
  • 2. Dividend ETFs
  • 3. Bond investing
  • 4. Invest in REITs
  • 5. GICs
  • Can passive income make you rich?
  • Is passive income taxable in Canada?

Passive income can be a lucrative way for time-strapped Canadians to earn extra cash without doing extra work. While not all passive income ideas are “lazy income”, many require as little as an upfront investment to get started, with minimal maintenance to keep it going.

With that in mind, let’s look at five passive income ideas that could help you generate some extra income this year.

What is passive income?

Passive income is a source of cash that requires very little ongoing maintenance to keep the income flowing. For example, you might earn monthly income from a book you published two years ago: you’re no longer working on the book, but the work done upfront is now paying you.

Most passive income sources require an upfront investment. Often, the investment is time and commitment, but it can be money, too, as in buying rental property or investing in dividend stocks.

Passive income strategies typically come in three main types:

  • Buy: You buy an asset (such as a stock) and earn interest or capital gains from selling it for a higher price.
  • Rent out: You share an asset you already own (like a spare bedroom or your car) for a price.
  • Create: You make a product—such as a book or website—that generates income.

The Top 5 Passive Income Ideas

If you’re looking for truly passive income—extra cash that requires no ongoing effort—then you’ll likely need to invest money in stocks, bonds, or funds. Below are some of the best truly passive sources of income that can help you generate some serious cash.

1. Dividend stocks

Adividend stockis a stock investment in which the company shares a portion of their earnings with their shareholders, called the dividend. For instance, a company might pay out $0.50 for every share that you own. Buy 1,000 shares, then, and you could earn $500 annually—just for holding that stock.

Of course, you’ll need to do research: you want to find companies that not only pay high dividends but also have strong business fundamentals. Companies can and often do suspend dividends, especially if their business is struggling or the economy is weak.The trick, then, is to find well-established companies that have been paying dividends consistently for long periods of time.

For instance, bank stocks are a safe bet, as they have some of the longest paying dividends in Canada. Here’s how long each of the Big Five banks have been paying dividends to shareholders:

  • Bank of Montreal: since 1829
  • Bank of Nova Scotia: since 1832
  • Toronto-Dominion Bank: since 1857
  • Canadian Imperial Bank of Commerce: since 1868
  • Royal Bank of Canada: since 1870

To figure out which companies are paying the highest dividends, you can compare dividend yields. A dividend yield is a percentage that tells you how much of your investment dollars you’ll get back annually as a dividend.

For instance, if a company has a 5% dividend yield, you’ll get $5 annually for every $100 that you invest. A $10,000 investment, then, would yield $500 in annual dividends, whereas a $100,000 investment would yield $5,000.

2. Dividend ETFs

A dividend ETF is an investment that contains shares from multiple dividend-paying companies. Exchange-traded funds (ETFs) can offer you exposure to more companies than you would perhaps get by handpicking individual stocks, and the built-in diversification can add extra padding against downside losses.

Dividend ETFs have a fund manager who picks a handful of dividend companies to invest in. Like stocks, dividend ETFs will pay out a regular dividend to its shareholders.

Some of the best dividend ETFs in Canada include:

  • Vanguard FTSE Canadian High Dividend Yield Index ETF
  • iShares S&P/TSA 60 Index ETF
  • BMO Canadian Dividend ETF

3. Bond investing

Conservative investors who don’t want to risk losing money on stocks can earn their passive income from another potentially lucrative investment: bonds.

Bonds are like stocks in that you lend your money to a company (or government) for financial compensation. But instead of earning money based on a company’s valuation, bonds generate income in the form of interest. You essentially lend your money and over time you get paid interest at a fixed rate of return.

RELATED: How to Buy Bonds in Canada

4. Invest in REITs

Real estate investment trusts (REITs) are real estate companies that buy and manage commercial properties. They’re like stocks in the sense that they’re publicly traded on major stock exchanges. But instead of generating revenues from products and services, REITs generate cash flow from selling and renting out real estate.

REIT companies get a major tax break if they distribute most of their profits to shareholders. This can translate into hefty dividends that are higher than even the highest-paying dividend stocks in Canada.

A few REITs you might want to consider include:

  • Morguard North American (TSX:MRG.UN)
  • SmartCentres (TSX:SRU.UN)
  • Allied Properties (TSX:AP.UN)

5. GICs

Aguaranteed investment certificate (GIC)is a low-risk, fixed income investment that guarantees returns for a specific period of time (called the term). You lend your money to a financial institution (like a bank), that pays you a fixed interest rate for the term of your GIC. When the term is over, you’ll get your initial deposit back.

Because GICs offer fixed income, their interest rates are lower than other investments. In general, the longer your GIC term, the higher your interest rate. The only problem with longer terms: they can come withwithdrawal restrictions or penalties, such as forfeiting interest earned, if you try to cash out before the term is up.

But there are some strategies that could make GICs a lucrative source of passive income.

One is GIC ladders. With a “ladder” strategy, you take out multiple GICs with both short and long terms. For instance, you could have a six-month GIC, a one-year GIC, a 1.5-year GIC, and a two-year GIC.

After six months, your first GIC will reach maturity, and the bank will give you your money plus interest. What’s more is thatall your GICs will be six months closer to maturity, meaning you technically have a six-month GIC, a one-year GIC, and a 1.5-year GIC. You can then buy another two-year GIC to keep the ladder going

Having multiple GICs helps you take advantage of the higher rates on long-term GICs, while also ensuring you don’t lock away your savings for longer than you can afford.

Can passive income make you rich?

Yes, passive income can make you wealthy. But very few passive income strategies will make you rich overnight. Oftentimes you must put in work, money, and time upfront to get substantial amounts of cash later.

Is passive income taxable in Canada?

Yes, passive income is taxable in Canada. That said, if you hold investments—such as dividend stocks—in an RRSP or TFSA, you won’t have to pay taxes on your earnings.

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Regarding the concepts mentioned in the article you provided, let's discuss each one in detail:

What is passive income?

Passive income refers to a source of cash that requires minimal ongoing effort or maintenance to generate income. It is income that continues to flow even when you are not actively working on it. Examples of passive income include earning royalties from a book you published, receiving dividends from stocks, or earning rental income from a property you own.

The Top 5 Passive Income Ideas

  1. Dividend stocks: Dividend stocks are stocks in which companies share a portion of their earnings with their shareholders in the form of dividends. By investing in dividend stocks, you can earn regular income from the dividends paid by the company. It is important to research and choose companies that have a history of consistently paying dividends and have strong business fundamentals.

  2. Dividend ETFs: Dividend ETFs (Exchange-Traded Funds) are investment funds that contain shares from multiple dividend-paying companies. Investing in dividend ETFs provides exposure to a diversified portfolio of dividend stocks, which can help mitigate risks and potentially generate regular income.

  3. Bond investing: Bonds are fixed-income investments where you lend money to a company or government entity in exchange for regular interest payments. Unlike stocks, which generate income through capital gains, bonds generate income through interest payments. Bond investing can be a conservative option for earning passive income, especially for investors who prefer lower-risk investments.

  4. Invest in REITs: Real Estate Investment Trusts (REITs) are companies that own and manage income-generating real estate properties. By investing in REITs, you can earn passive income through dividends paid by the company. REITs are publicly traded on major stock exchanges and can provide a tax advantage if they distribute most of their profits to shareholders.

  5. GICs: Guaranteed Investment Certificates (GICs) are low-risk, fixed-income investments offered by financial institutions. With GICs, you lend your money to the institution for a specific period of time and receive a fixed interest rate in return. GICs can provide a predictable source of passive income, although the interest rates are generally lower compared to other investments.

Can passive income make you rich?

While passive income can be a valuable source of additional income, it is unlikely to make you rich overnight. Most passive income strategies require upfront investment, time, and effort to generate substantial amounts of cash later. However, with careful planning and consistent investment, passive income can contribute to long-term wealth accumulation.

Is passive income taxable in Canada?

Yes, passive income is taxable in Canada. However, there are certain tax advantages available for passive income earned through investments held in registered accounts such as Registered Retirement Savings Plans (RRSPs) or Tax-Free Savings Accounts (TFSAs). Income earned within these accounts is generally not subject to taxes until withdrawn.

I hope this information helps you understand the concepts mentioned in the article. If you have any further questions or need more details, feel free to ask!

5 Ways to Earn Passive Income in Canada (2024)
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