How to Create $500 in Passive Income Each and Every Month

Combining your TFSA with a covered call ETF can create some very lucrative passive-income streams.

| More on:
Payday ringed on a calendar

Image source: Getty Images

Who doesn’t dream about passive income? The thought of sitting back, relaxing, doing nothing, and enjoying a juicy dividend cheque hassle free every month is a pipe dream for many. That being said, how does one actually go about getting a passive-income stream going?

Beyond rental properties, affiliate marketing, or licensing music, there’s a simpler, yet overlooked way of earning passive income. It involves combining your Tax-Free Savings Account, or TFSA plus a high-yield exchange-traded fund, or ETF. Here’s how to get started.

Step #1: Contribute to a TFSA

If you’re looking to maximize your passive-income potential, you’ll want to prioritize your TFSA. This is because Canadian dividends and interest income earned here and withdrawn are 100% tax free.

Depending on when you were born, you could have up to $88,000 in contribution room if you have never invested in a TFSA prior to 2023. Each year, your TFSA limit will increase.

For 2023, the TFSA contribution limit was raised to a $6,500 from $6,000. If you have the dough, consider contributing the amount and ensuring your TFSA is as maxed out as it can be.

Step #2: Invest in a covered call ETF

Personally, my TFSA is held in a portfolio of low-cost index ETFs, but that’s because my goal is long-term growth, not passive income.

If you want to prioritize high monthly income, a good alternative to index funds and individual dividend stocks is something like BMO Covered Call Canadian Banks ETF (TSX:ZWB).

Here’s how ZWB works. First, the ETF holds all of the “Big Six” Canadian bank stocks in equal weights. Then the ETF sells covered call options against them to generate additional income.

The covered call options basically convert future share price appreciation of the underlying Big Six bank stocks into an immediate cash premium. You’re trading long-term growth for present income.

Finally, the covered call premiums are combined with the regular quarterly dividends from the Big Six bank stocks and paid out to investors on a monthly basis.

Step #3: Calculate payout

ZWB currently has an annualized distribution yield of 7.31%. Assuming ZWC’s most recent December monthly distribution of $0.11 and current share price at the time of writing of $18.41 remained consistent moving forward, an investor who buys $88,000 worth of ZWC could expect the following monthly payout:

COMPANYRECENT PRICENUMBER OF SHARESDIVIDENDTOTAL PAYOUTFREQUENCY
ZWC$18.414,780$0.11$525.80Monthly

That being said, sinking $88,000 into ETF holding just six Canadian bank stocks isn’t the best for diversification. Consider augmenting ZWB with a few key Canadian dividend stock picks from other industries (and the Fool has some great suggestions for those down below).

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 Bank Stocks

stock research, analyze data
Bank Stocks

Better Buy: TD Stock or Bank of Nova Scotia?

TD Bank and Bank of Nova Scotia still look cheap. Is one a good buy today?

Read more »

edit Four girl friends withdrawing money from credit card at ATM
Bank Stocks

2 Top TSX Bank Stocks to Buy in February 2023

Here's why Toronto-Dominion Bank (TSX:TD) and Bank of Nova Scotia (TSX:BNS) are two top TSX bank stocks to consider right…

Read more »

grow money, wealth build
Bank Stocks

TFSA Investors: A Big Bank Stock That Pays Almost 6% in Dividend Income

A Big Bank stock is an ideal core holding in a TFSA, not only for its financial stability but also…

Read more »

Target. Stand out from the crowd
Bank Stocks

BMO Stock looks Better Than its Peers in January 2023

What's next for BMO stock after a downfall in 2022?

Read more »

Bank sign on traditional europe building facade
Bank Stocks

As Banks Expand South of the Border, Which Is the Better Bet for Growth?

Canada’s big banks are expanding into the U.S. market. Here’s a look at which of these titans is a better…

Read more »

Young woman sat at laptop by a window
Bank Stocks

Could BMO Stock Be a Big Winner in 2023?

Long-term investors should take a closer look at BMO stock as a potential core holding, especially on dips.

Read more »

IMAGE OF A NOTEBOOK WITH TFSA WRITTEN ON IT
Tech Stocks

TFSA Passive Income: How I’m Investing to Make $2,000/Year From Dividends

I am increasing my dividend income by investing in dividend stocks like the Toronto-Dominion Bank.

Read more »

Make a choice, path to success, sign
Bank Stocks

Of the Big 6 Bank Stocks: Buy This, Not That

CIBC (TSX:CM) is an interesting Big Six bank stock to buy right now.

Read more »