TFSA Passive Income: Earn $480/Month Tax Free

A covered call ETF in a TFSA can produce a lucrative stream of tax-free income.

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The 2023 Tax-Free Savings Account (TFSA) contribution limits have been out for a while now, but for readers out of the loop, it’s sitting at $6,500. If you turned 18 in 2009 and have yet to contribute to a TFSA, then you have a cool $88,000 in contribution room altogether.

Now, if you’re a growth investor, then you might consider filling your TFSA with various exchange-traded funds and stock picks to snowball over time. But what if your priority is income? Given that withdrawals from a TFSA are tax free, using it for income could be very lucrative.

The problem is finding an asset that pays out a sufficiently high yield, does so on a monthly basis, and is still somewhat diversified. This rules out many dividend stocks, which tend to come from a few sectors, have yields around 4-5%, and pay quarterly. Here’s my solution.

Consider an ETF

I think using an income-oriented exchange-trade fund, or ETF, makes sense here. Some ETFs pay very high yields, hold a diversified portfolio of stocks, and pay out monthly. A great example on my radar is BMO Canadian High Dividend Covered Call ETF (TSX:ZWC).

ZWC starts by picking a portfolio of 105 blue-chip Canadian dividend stocks, with many coming from the TSX financial, energy, and telecom sectors. On its own, this portfolio of dividend stocks already pays a decent yield. However, ZWC takes it to the next level with a derivative known as a covered call.

By selling covered call options on some of its holdings, ZWC basically sacrifices some future upside potential in exchange for immediate income. Think of this as turning future gains into an immediate cash premium, which is paid out monthly.

As a result, ZWC’s share price won’t see much movement upwards, but it does spit out a very high dividend. Currently, ZWC has an annualized distribution yield of 7.44% based on its most recent dividend and current share price. This is higher than many Canadian dividend stocks!

Investing for a $480 monthly payout

Assuming ZWC’s most recent January monthly distribution of $0.10 and current share price at time of writing of $17.99 remained consistent moving forward, an investor with a maxed-out TFSA of $88,000 invested in ZWC could expect the following monthly payout:


ZWC’s distribution has remained steady at a $0.10 monthly payout since last year, but keep in mind that this can change. In addition, sinking $88,000 into ZWC isn’t a good idea, given that it only holds 105 Canadian dividend stocks. Consider diversifying with U.S. stocks or growth stocks!

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.

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