Need Passive Income? Turn $5,000 into $800~ Every Month

Here’s how investors can turn even modest sums into a viable tax-free passive income stream.

| More on:
exchange-traded funds

Image source: Getty Images

A big component of the financially independent, retire early (FIRE) movement is a source of passive income. Commonly, this comes from real estate in the form of a rental property. However, the housing market is red-hot these days and unattainable for many investors.

An alternative is investing using the right mix in your Tax-Free Savings Account, or TFSA. Dividends earned and withdrawals made when it comes to a TFSA are tax-free, like its name suggests. Here are some ideas on how to turn a modest $5,000 investment into $800~ of monthly income.

Getting started in your TFSA

Obviously, $5,000 isn’t enough to generate any sort of meaningful monthly passive income. Even with a very high (and risky) 10% annual yield, you’re looking at just $41.67 every month. Therefore, we have to grow our TFSA a bit before investing for passive income.

The first step to grow your TFSA is investing in quality assets that are expected to grow over the medium to long term. A great pick here is an exchange-traded fund, or ETF, like the BMO S&P 500 Index ETF (TSX:ZSP), which is both low-cost and fairly diversified.

From there, all you need to do is hold steadfast, reinvest dividends, and keep up the pace of your annual TFSA contributions (the limit for 2023 is $6,500). If you did this from 2012 to 2022 (10 years), you would have turned the initial $5,000 and annual $6,500 contributions into $153,546.

Picking a monthly income-generating asset

Of course, holding for longer than 10 years would likely ensure that your final portfolio value is much, much higher thanks to the power of compounding. That being said, let’s assume you decide to call it quits while you’re still young and want to enjoy the passive income as soon as possible.

With the $153,546 in your TFSA, you could invest in the BMO Canadian High Dividend Covered Call ETF (TSX:ZWC). This ETF sells covered call options against a portfolio of Canadian dividend stocks, which converts the future share price appreciation of these stocks into an immediate cash premium.

The cash premium from the options is combined with the regular dividend income from the stocks and paid out on a monthly basis. Currently, ZWC has an annualized distribution yield of 7.02%. The ETF charges a management expense ratio of 0.72%.

Assuming ZWC’s most recent December monthly distribution of $0.10 and the current share price at time of writing of $17.35 remained consistent moving forward, an investor who buys $153,546 worth of ZWC could expect the following approximate monthly payout:

COMPANYRECENT PRICENUMBER OF SHARESDIVIDENDTOTAL PAYOUTFREQUENCY
ZWC$17.358,849$0.10$884.90Monthly

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Tony Dong has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

More on Investing

analyze data
Investing

Better Buy: Shopify Stock vs. Aritzia

Growth stocks like Aritzia (TSX:ATZ) could outperform in the years ahead.

Read more »

A close up image of Canadian $20 Dollar bills
Dividend Stocks

Level Up Your Passive Income With 3 High-Yielding Stocks

Given their solid underlying businesses and high dividend yields, these three companies are an excellent buy for income-seeking investors.

Read more »

Man data analyze
Dividend Stocks

Beat the TSX With This Unstoppable Dividend Payer

BCE Inc. (TSX:BCE) could outperform the market with its dividend growth.

Read more »

Profit dial turned up to maximum
Dividend Stocks

Canadian Tire Stock Rose 15% in January 2023

Canadian Tire (TSX:CTC.A) stock continues to climb upwards yet still trades in value territory and with a solid dividend, as…

Read more »

healthcare pharma
Tech Stocks

Is Well Health Stock a Buy in February 2023?

WELL Health (TSX:WELL) stock is up 26% in the last month alone, but with full-year earnings still expected, that could…

Read more »

A shopper makes purchases from an online store.
Tech Stocks

Is Shopify Stock a Buy Before Its Q4 2022 Earnings?

SHOP stock has soared a handsome 50% so far in 2023, notably beating its peers.

Read more »

Canadian Dollars
Dividend Stocks

TFSA Investors: Where to Invest $6,500 in 2023

Here are three TSX stocks for TFSA investors.

Read more »

Payday ringed on a calendar
Dividend Stocks

Need $100? The Best Dividend Stocks for Monthly Income

These two dividend stocks are the best choices on the market if you want the best bang for your buck…

Read more »