TFSA Investors: How to Make $500/Month in Passive Income

It would be such a waste if you’re not maximizing your Tax-Free Savings Account (TFSA). You could be wasting as much as $88,000 of room to invest without paying any taxes on it! In fact, you could make a passive income-generating machine out of your TFSA.

Manulife stock

Let’s take Manulife (TSX:MFC) as an example. The life and health insurance company that has produced stable and growing adjusted earnings in the past decade. It increased its adjusted earnings per share (EPS) at a compound annual growth rate (CAGR) of 10.7% in the period. With growing earnings, the insurer was able to increase its dividend per share at a similar rate of 9.8%.

Investors who held the insurance stock about 10 years ago would have seen their yield on cost (YOC) jump from approximately 3% to 8.5%, assuming they did not add to their position over time. That’s essentially doing nothing but holding the shares and seeing your income increase by 180%! (YOC is calculated by dividing a stock’s current dividend by the price paid for the stock.)

Interestingly, the value stock is not expensive. At $27.41 per share at writing, it trades at about 8.7 times earnings, while analysts forecast it can grow its EPS at a CAGR of about 7.4% over the next few years. The dividend stock’s annualized payout is $1.46, which equates to a nice yield of 5.3%.

MFC stock’s trailing-12-month payout ratio was sustainable at about 40%. So, if the company is able to increase its earnings by about 7%, it can also increase its dividend by about 7% over the next few years.

Temporary dividend freeze

A situation that investors need to be aware of is that during highly uncertain economic times like a recession, the Office of the Superintendent of Financial Institutions (OSFI) can restrict federally regulated financial institutions like Manulife from raising their dividends to ensure the stability, security, and soundness of our financial system. In such a situation, it’s not something that Manulife can control. And investors would just need to bear through it.

Is Manulife stock a better investment than GICs?

Currently, the best one-year GIC rate is 5.3%. Manulife stock offers a dividend yield of just over 5.3%. Since Manulife has what it takes to increase its dividend payments, does it make the dividend stock a better investment?

Interest income from GICs is taxed at your marginal tax rate versus eligible dividend income that’s favourably taxed in taxable accounts. However, this is a non-factor when investing in a TFSA for which you’d pay no taxes on the income (and materialized capital gains for that matter).

What you do need to be aware of is that common stocks like Manulife stock are riskier investments than GICs. Whereas GICs guarantee your principal and the interest promised, in the worst case scenario, you could lose your entire investment on common stocks.

Moreover, dividend income isn’t guaranteed. Only declared dividends must be paid to shareholders. For instance, a dividend stock could increase its dividend now and end up cutting it next month.

Stocks are also volatile. So, they’re meant for long-term capital.

All said and done, Manulife stock’s dividend seems to be healthy currently.

$500/month in passive income

How much do you need to invest to generate $500/month (or $6,000/year) in passive income from Manulife. Here’s a table for illustration.

If you do the math, that’s a total investment of $112,655.10 before any commission fees. That’s a big investment in a single stock. Investors should remember to maintain proper portfolio diversification. Here are some other top monthly dividend stocks you can research for your TFSA.