Traditional forms of passive income, like GICs (guaranteed investment certificates) and money market funds, become less attractive as interest rates fall. Many Canadian investors need to return to the stock market to capture passive income. While this poses higher risks, it also presents higher upside potential.

GICs are less attractive, so stocks are the perfect place for passive income

Stocks can generate both passive income and capital gains. The combination of the two can make for a great investment. However, you also have to be wary. Buying a stock just to get a high dividend yield can be dangerous.

A high dividend yield (like those trading above 7%) shows that the market has serious concerns about a company’s business or finances. A high yield is the first warning that an investor should evaluate the company carefully before adding it.

Don’t just look at high yielding stocks

Stocks that trade with a yield between 3% and 6% tend to be a safer place to look. These stocks can generate enough cash to grow their business, pay dividends, and even increase their dividends.

You also tend to get much better stock appreciation from these stocks. If their earnings per share increase, there’s a good chance their stock price will increase at the same rate.

How to earn $2,000 in annual passive income with a 4.5% return

If you have a goal of $2,000 in passive income, you can easily determine how much money you’ll need to invest. Simply divide $2,000 by your predicted average wallet yield.

An average yield of 4.5% is entirely achievable on the Toronto Stock Exchange Today. If you divide your $2,000 goal by a 4.5% return, you’ll need to invest about $45,000 today. The good news is that there are many titles in this range.

First Cap: A quality real estate portfolio

For example, First Capital Real Estate Investment Trust (TSX:FCR.UN) the stock today offers a distribution yield of 4.8%. It is one of the largest owners of urban grocery stores in Canada.

Most REIT tenants provide essential services (think grocery and value stores, banks, medical clinics, etc.). As a result, this REIT is very economically resilient. Its high-quality locations allow it to benefit from strong growth in rental rates and a high occupancy rate (above 96%).

The REIT owns vast land and development assets which are still not taken into account in the share price. This stock offers a good mix of passive income and value to investors today.

Pembina: a safe and stable stock for dividends

Another example is Pembina Pipeline (TSX:PPL). It offers passive income investors a dividend yield of 4.7%. It is one of Western Canada’s largest energy infrastructure companies.

A very contracted profit stream helps support its dividend. With a low dividend payout ratio, the company has generated a lot of excess cash. As a result, its balance sheet is the best in the industry.

This has allowed Pembina to make several smart acquisitions in recent years. Likewise, it has over $3.5 billion in high-quality infrastructure projects underway.

These projects are expected to support mid-single-digit growth over the coming years. For stable passive income and consistent growth prospects, Pembina is a great stock to buy and hold.