Retirement Planning: How to Generate $3,000 in Monthly Income

When you plan to retire, it’s important to think of ways to supplement your income. Not everyone has the benefit of a soft pension. The Canada Pension Plan (CPP) is barely enough to live on.

Inflation has risen enormously in recent years. If you have a fixed retirement income, you need ways to offset the humiliating costs of inflation.

Stocks are a great passive income alternative for retirement

Despite their volatility, stocks are an attractive place to look for passive income. Shares are completely liquid and you can buy and sell them cost-effectively whenever and however you want.

If you’re wondering how to earn $3,000 in monthly supplemental income, you first need to know how much capital you need to invest. Keep in mind that $3,000 per month is $36,000 annually.

You need $800,000 – $1.6 million to earn $30,000/month

There are a number of ways you can collect that required return. The first is that as a passive investor you could buy an index fund. The iShares Core S&P/TSX Composite Index ETF today offers a dividend yield of 2.2%.

If you want to earn an average of $3,000 per month, you need to invest $1.6 million ($36,000 divided by 2.2%). While there’s nothing wrong with passive investing, most investors will likely do much better if they build their own investment portfolio.

There are plenty of quality companies paying dividends between 3% and 6%. If you could achieve an average portfolio return of 4.5%, you would only need to invest $800,000 to earn $3,000 per month ($36,000 divided by 4.5%). That’s half the capital you would need if you bought just the index ETF.

If building your own retirement portfolio is an attractive strategy, there are a few stocks you may want to look at Fortis (TSX:FTS) with a yield of 3.5%, First capital REIT (TSX:FCR.UN) with a yield of 4.7%, and Pembina Pipeline (TSX:PPL) with a yield of 5.6%. Combined, these three stocks could deliver an average dividend yield of 4.6%.

Fortis: a perfect pension share

Fortis is the perfect anchor for retirees’ portfolios. The nine regulated North American utilities focus on transmission and distribution. These are some of the most stable utilities you can find.

Fortis comes closest to a bond. But unlike a bond, the payments actually grow. It has a 52-year history of consecutively increasing its annual dividend.

With a target of growing the dividend by 5 to 7% annually, dividend income should more than offset inflation.

First capital REIT

First Capital REIT is one of the largest retail landlords in Canada. The properties provide essential goods and services such as groceries, pharmacy, medical and financial services.

With a focus on urban centers, the properties are well located and very attractive. It has enjoyed mid to high single digits growth in rental prices in recent years.

First Cap pays a consistent monthly benefit. Since its balance sheet has improved significantly over the past three years, the company could expand its distribution in the coming years. FCR.UN could be a nice monthly dividend stock for retirement.

Pembina Pipeline

Pembina Pipeline is one of Canada’s largest energy infrastructure companies. It earns contracted income streams that largely cover its dividend. Even when energy prices turned negative in 2020, the country still paid its dividend.

Pembina has grown its annual dividend by a low single-digit percentage. The company will experience modest growth in the coming years, especially after it completes its LNG terminal in British Columbia. Overall, it’s a solid bet for stable passive retirement income.