Do you want to earn $2,000 in annual passive income? This may seem difficult to achieve, but in reality, you can do it with less than $51,000 in savings. If you invest $51,000 with an average dividend yield of 3.95%, you will get over $2,000 in annual dividend income. In this article, I will explore how you can safely achieve such a return and get $2,000 per year in tax-free passive income into your TFSA or RRSP.

Invest in Canadian dividend stocks

Investing in Canadian dividend stocks is a great way to get extra passive income into your account every quarter – sometimes every month. The Canadian market has a higher dividend yield than its U.S. counterparts, due to its disproportionate weighting in high-yielding sectors like banks, energy and utilities. This makes the Canadian market a great market to invest in if you are looking for some return.

As for how to get that Canadian dividend representation in your portfolio: it’s worth investing in exchange-traded funds (ETFs). ETFs are pooled investment vehicles that purchase large portfolios of stocks, giving you portfolio diversification. Diversification reduces your risk by “spreading your eggs among many baskets.” As a result, you are less likely to lose money investing in an ETF compared to a randomly chosen individual stock.

Consider it Vanguard FTSE Canadian High Yield Dividend ETF (TSX:VDY) For example. This is an ETF offered by Vanguard that invests in high-yielding Canadian stocks. The fund pays a monthly distribution of $0.16, which means $1.92 per year. At the current price of $48.64, these dividends offer a dividend yield of 3.95%.

How much do you need to invest to get $2,000 in annual passive income with $1.92 in annual dividends per share of $48.64? Just under $51,000, as shown in the table below.

Of course, you shouldn’t invest all your money in VDY just because it offers a high dividend yield. You need other reasons to invest in the fund. Fortunately, VDY has much more to recommend it than just dividends. It is very diverse, with 54 titles. It has a price-to-earnings (P/E) ratio of 15.2 and a price-to-earnings (P/B) ratio of 1.7, both of which indicate a relatively cheap price. Finally, the stocks in the portfolio have a return on equity of 12.4% and an earnings growth rate of 8.3%, indicating that they are performing well. Overall, VDY appears to be a quality ETF.

Stupid Takeaway

There you have it. It takes $50,683 invested with a 3.95% dividend yield to get $2,000 in annual dividend income. That’s not a lot of money to invest, all things considered. And if you get your 3.95% return in the form of Vanguard’s High Yield Canada ETF, you’ll receive your income every month! Overall, it’s an investment worth considering as we approach the final days of 2024 and prepare for the new year.