What does financial freedom or financial independence entail when you have income generating assets working for you? To me, financial freedom means that the income that you have generated per month (without having to work your regular job) covers your monthly expenses. This will give you a work optional life. You don’t need to work to keep paying your monthly expenses because you have income producing assets. Here are some income generating assets ideas to get you started.
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What Are Income Generating Assets?
How does having income generating assets work? Well, people have different definitions of the term ‘asset’, but to me, an asset is something that can produce passive income (or currently produces income).
A primary residence is not really an asset (though some may beg to differ) unless you are renting a portion of it out because it does not produce income. Cash flow is important, and income producing assets come into play here. Most other Canadian personal finance blogs would agree.
To do this, one would need to focus on income producing assets. Net worth means nothing if you don’t have cash flow.
Cash flow (or income) is KING.
And to generate cash flow, you need to focus on owning income producing assets.
You can own a $2,000,000 house in cash but if you don’t have any money coming in you won’t be able to pay for food, for electricity, for property taxes, or for your financial freedom.
Here are 10 Income Producing Assets to help you achieve financial freedom, so you can spend your time on your own terms. Income generating assets examples include stocks, bonds, ETFs, rental properties.
These income producing assets are high interest savings accounts, dividend stocks, ETFs that track the index, bonds, REITs, ETFs that you can ‘prune or trim’, peer to peer lending, renting out your property, or creating a new product. Even better many of these are passive income in Canada generating assets.
Your money (invested in these assets) will be working for you instead of you working for money.
GICs and High Interest Savings Accounts (HISAS)
This is the safest form of income-producing asset.
Interest rates are rising, which means that the return on your money invested in high-interest savings accounts is improving.
Here are a few banks that are offering awesome interest rates rates right now as of writing. Interest is usually calculated on the daily closing balance and paid monthly. All below are government insured meaning that your Canadian dollar investment, up to $100,000 with each institution is protected.
|Financial Institution||High Interest Savings Account||Rate|
|Tangerine Bank||Tangerine Savings Account||6.00% for the first 5 months|
|EQ Bank||EQ Bank Savings Plus||2.50%*|
|Canadian Tire||Canadian Tire High Interest Savings Account||3.50%|
|Alterna Bank||Alterna High Interest Savings Account||2.25%|
|Oaken Financial||Oaken Savings Account||3.40%|
|Simplii Financial||Simplii Financial High Interest Savings Account||6.00% (promotional)|
|Royal Bank of Canada||RBC Royal Bank High Interest eSavings||0.05%|
The content is not provided by the issuer. Any opinions expressed are those of the genymoney.ca alone, and have not been reviewed, approved, or otherwise endorsed by the issuer.
I usually move my money out of my chequing account (if you’re looking for a new chequing account might as well sign up for a cash or iPad bonus) into a high interest savings account on pay day.
- EQ Bank’s Savings Plus Account 2.50% every day interest rate*-This is one of the highest rates in Canada. There are no fees, no minimum balance, you get UNLIMITED INTERAC e-TRANSFERS® (my usual bank charges me over $2 each e-transfer!). There is no physical branch, it is all done online. It is a trademark of Equitable Bank. The maximum balance is $200,000, which is a good problem to have if you have more than that to plunk in a savings account 😉 (funds up to $100,000 are eligible for deposit insurance). Rates are of course subject to change without notice, so better act fast. I recently signed up for EQ Bank, here’s my review of EQ Bank.
- Alterna Bank High-Interest eSavings Account – No minimum balance.
- Tangerine Savings Account 5.00% for the first five months. After signing up, you will get an “Orange Key” that you can share with family and friends to get a $50 cash bonus into your account if they deposit $250.
- Wealthsimple Cash Account– 0.90%
- Scotiabank Preferred Savings Account– Some of the big banks are providing better interest rates for savings accounts (big banks are notorious for having not so great rates). Here’s my review.
- Canadian Tire High Interest Savings Account–
So if you invest $10,000 of your cash assets in EQ Bank, you will get $150 income after 1 year, provided that you don’t touch the principal.
One thing to note is that if you have your high-interest savings account in a non-registered account (meaning outside of a TFSA or an RRSP), the interest income (e.g. $170) will be taxed at your marginal rate, which isn’t very tax efficient, unfortunately. You can visit taxtips.ca to check out what the marginal rate is in your province or territory.
GIC’s and High Interest Savings Accounts are the safest forms of income producing assets. For the consideration between whether you should invest in a high-interest savings vs GIC, check out this post. One thing to note is that redeeming your GIC before the maturity date can be difficult to do and there may be penalties that you are unaware of.
Real Estate Investment Trusts (REITs)
REIT stands for Real Estate Investment Trust. You can own real estate without ever having to leave your home or deal with annoying tenants. REITs are companies that own at least 75% of their assets in real estate and receive rental income.
They distribute the rental income received to their shareholders. You can also decrease your risk from buying an individual REIT company by buying a REIT ETF (Exchange Traded Fund). REITs are not without risk, of course. REIT prices have been going down because interest rates have been going up.
Here are the largest REITs in Canada according to market cap, as per Globe and Mail. I have a few REITs and started a position in a REIT ETF myself.
Owning bonds is another income producing asset. Bonds are not as big of a part of my investment portfolio as it was in the past, though they are a wise investment for some, depending on your risk tolerance and investment horizon.
When you purchase a bond, you provide a government or corporation money in exchange for the promise of interest payments for a certain period. When the bond matures, the interest payments stop and then your initial investment is returned to you.
For recommendations on bond ETFs to hold in your income producing asset portfolio, check out Rob Carrick’s Bond Buying Guide for Beginners on Money Sense.
You could even invest in green bonds if you wanted to.
Dividend paying stocks probably my favourite income producing asset, or one of the best income generating assets, if you will.
What are dividends?
Dividends are a portion of a company’s earnings paid out to the shareholders on a quarterly or sometimes monthly basis. Many long-term dividend-paying companies have been paying dividends to shareholders for decades. In addition to that, many companies (that have reliably raised dividends in the past) continue to raise dividends, often greater than the pace of inflation.
A company pays out dividends according to their dividend yield. Let’s say that a company is trading for $100.00 and their dividend yield is 4%. That means that they pay out $4.00 annually, or $1.00 every quarter of the year.
Let’s say you buy 100 shares of the $100 company, for a total of $10,000. Every year, you will get $400, and every quarter of the year, you will receive $100. If the company continues to raise its dividend, you will receive even more over time, even from your initial share purchase of $10,000.
So down the line, as the company grows and outperforms the market and the stock price goes up to $150, the company’s earnings are doing well and they continue to raise their dividend, you could end up with a scenario of $500 paid annually with only a $10,000 investment.
That’s dividend growth investing in a nutshell.
In Canada, dividend income from Canadian corporations is taxed at a preferential rate. So preferential, that you could receive up to $50,000 in dividend income and pay very little tax on it (provided you have no other sources of income).
Related: How are dividends taxed in Canada?
You can even drip dividends (reinvest the dividends received to buy more stock commission free, thus growing your dividend snowball even bigger and at a faster pace).
Dividends are beautiful, aren’t they? I liken dividend investing to gardening.
Here is my recent divided income year over year, I track it through a free investment tracker platform called Wealthica.
This post may contain affiliate links. Please see genymoney.ca’s disclaimer for more information.
To invest in dividends, you need to open up a brokerage account in order to DIY invest. To get started, many people follow Canadian dividend investing blogs for ideas on which dividend-paying companies to hold in their portfolio.
Here are my all-time favourite 5 Canadian dividend stocks to invest in.
ETFs that Track the Index
Another way that you could have a income producing asset is by investing in index funds.
You can invest in the index using Exchange Traded Funds (ETFs), they are bought and sold just like a stock but ETFs have hundreds and thousands of companies within the fund.
Typically ETFs and other index funds that track the market do not pay out cash dividends. However, many ETFs that track the market have distributions. Although they don’t compare to the 3-5% that you may get with a dividend stock, you are still getting under a 2% yield in most cases.
Related: Tangerine Investment Funds Review
For example, one of my major ETF holdings is VXC.TO (Vanguard Global All Cap Ex-Canada) and it has a 1.75% yield. Not an ‘out of this world’ yield, but compounded with capital growth, it’s not too shabby.
Another US listed ETF I am a big fan of is VTI.
ETFs are free to purchase with a discount brokerage such as Questrade. This helps lower your cost to invest especially if you use the dollar cost averaging approach to invest in ETFs on a monthly basis as I do.
Some ETFs are even called “all in one ETFs” meaning they rebalance themselves and all you have to do is contribute your money. One such ETF is called VGRO.
Another ETF option are Canadian Covered Call ETFs. They are taxed more favourably because the options premiums are considered capital gains. The income can be 6-7% annually and paid monthly. The MERs are higher than other ETFs though because they are actively managed and are around 0.65%.
DIY Income Generating Assets: Prune Your Own Income Producing Investment Portfolio
Another way to invest in an income producing asset is to produce your own income by pruning the asset yourself. Similar to how the safe withdrawal rate works, you sell portions of your non-dividend paying stock or index fund to generate your own income.
A built in income generating asset.
An example of this is let’s say you have $100,000 in Warren Buffett’s Berkshire Hathaway (BRK.B) shares (which is well known to have never paid a dividend ever and the shareholders voted against having a dividend paid out as well). As it continues to appreciate you can ‘prune’ some of that money by selling a few shares to generate income.
It’s like having your own money tree. Take a few fruits of no-labor from the tree when you have that income producing asset.
Keep in mind that whatever you sell you will be taxed for capital gains, which is around 50% of your marginal rate.
The problem with this approach is you need to keep track of your adjusted cost base for capital gains.
For more information on tax-efficient investing in Canada, check out my post here.
For a look at what your marginal rate is, I recommend the website taxtips.ca.
Income Generating Assets: Renting Out Property
If you have property other than your primary residence, you can rent it out as a rental property. A rental property is an income producing property definition.
There are a lot of factors to consider when renting out a property. Are you going to do a short-term rental (for example, through Airbnb or VRBO) and is it allowed in your municipality? Are you going to do long term rental? Who is your intended tenant demographic and how much are you going to charge? Does the rental income exceed the expenses (if it does not run far away because you are not producing income from your asset!)?
Consider the expenses such as maintenance, property management (if you choose to go that route, usually they charge 5-10% of your monthly rent), mortgage interest (if any), property taxes… the list goes on.
Personally, I would prefer to deal with rental property that is within an easy commute or access for me so that it is less time-consuming. I have dabbled in Airbnb in the past with my condo when I was out of town and it was a great way to cover the cost of my vacation (and then some).
In addition, if you have a parking stall you can also rent that out if allowed in your strata. Parking stalls can go for $50 to $100 a month (and up) especially if you are in a well-desired area (like downtown) and you don’t need the stall for yourself anyways.
You could also consider a laneway house, here are the pros and cons of having a laneway.
Real Estate Crowdfunding with addy
Alternatively, if you want to eschew dealing with tenants but really want to ‘get into the Canadian real estate market’ there’s something called real estate crowdfunding in Canada where you can invest in a property for as little as $1.
With this low investment threshold, you can still receive some income relative to your initial investment (depending on the offering for each property) paid into your addy wallet. This income is in the form of distributions and a T5 slip will be issued.
The minimum you can invest with addy per offering is $1 and the maximum you can invest with addy per offering is $1500, unless you are an accredited investor.
There are no maximum number of properties you can invest with addy and their offerings are selling out within hours these days.
Hundreds of investors ‘crowdfund’ their money in order to purchase or finance the real estate offering. Each property is vetted and reviewed and then an offering for addy investors to invest is made on the addy platform.
Peer to Peer Lending
Another income producing asset is peer to peer lending. I have not tried peer-to-peer lending yet myself, but it is something that I have always been interested in. This involves acting as the lender for businesses that apply for loans. Some of the loans may not get paid off so it can be risky.
One of the companies in Canada that does peer-to-peer lending is Lending Loop, they are a fin tech company that was launched in 2015, as per Globe and Mail.
Here are their statistics on the number of loans currently in place and number of loans defaulted.
While I have not invested with Lending Loop myself, Sherry from Save Spend Splurge has done well with it as a source of side income and has a review on her blog.
Unfortunately with the pandemic, there has been less applications for loans from small business owners and more defaulting on loans therefore this has not been as great of an income producing asset.
Create Your Own PRoduct
Finally, create your own product is a relatively low-cost way to generate income through the production of an asset (something that you made). It takes a lot of sweat work and time initially, but it can pay off in the end. This is a low cost income generating asset, you don’t need to put in money capital but you need to invest your human capital (time and effort).
You can create and publish your own book through Kindle Publishing or make an eBook PDF and sell through your online site or blog.
For more ecourse platforms available, Mompreneur has 11 Platforms for Solopreneurs to Sell Online Courses.
Entrepreneurship takes a lot of sweat capital, grit, perseverance and determination but can pay off in the end if you are patient (and don’t give up).
Summary of INcome Generating Assets in Canada
Hopefully at least a few of these 10 ways to get income producing assets will be of use to you to propel you on your journey to financial freedom and financial independence so you can get rich in Canada.
The best way to build up these income generating assets is to put away your paycheque to build wealth.
Here’s a summary again of the list of income generating assets in Canada:
- GIC’s and High Interest Savings Accounts
- Real estate crowdfunding like addy
- Dividend stocks
- DIY income generating assets with ETFs that track the index
- Pruning your own ETF ‘tree’
- Renting out Property
- Peer to Peer Lending like Lending Loop
- Creating your own product (like an eCourse, or a PDF book)
If you’re looking at passive income to fund your retirement, a good idea would be to calculate your retirement income sources to make sure you have enough.
These assets that generate cash flow will be so satisfying later on when you live off your passive income.
What are your favourite income producing assets or income generating assets?
Which one of these 10 Income Producing Assets have you tried?
GYM is a 30 something millennial interested in achieving financial freedom through disciplined saving, dividend and ETF investing, and living a minimalist lifestyle. Before you go, check out my recommendations page of financial tools I use to save and invest money. Don’t forget to subscribe for blog updates, a free dividend yield spreadsheet, and the free Young Money Bootcamp eCourse.