How to Earn $500 in Tax-Free Monthly Passive Income

Every income source has risk, whether a business, freelancing gig, or salaried job. So why not build a pipeline of alternate income while you still have a working income? Dividend stocks and interest-paying deposits are good ways to earn passive income. 

• You can collect dividend income, reinvest it in different stocks, and build a portfolio with an overall dividend yield greater than 5%. Or you can invest in a growth stock. These fast revenue growers will help you build a diversified portfolio and enhance your chances of return in every market. But this method needs your active participation in stock trading.
• Another method is to automate this process by investing in a dividend reinvestment plan (DRIP). You can save on brokerage costs and get the benefit of dollar-cost averaging. The drawback is a lack of diversification, and the company might stop the DRIP. 

Two stocks with over a 5% yield to earn passive income 

Both methods have their pros and cons. You can get the best of both while diversifying your portfolio into uncorrelated sectors by investing in the below stocks.

TC Energy stock 

TC Energy (TSX: TRP) is a Canadian oil and gas pipeline company that enjoys regular cash flows from toll money. Oil volume and price, oil spills from its pipelines, and delays in pipeline construction are some factors that impact the stock.

In early December, its Keystone Pipeline project had a major leak that pulled down the stock price by almost 9% and inflated its dividend yield to 7%. Then, delays in its Coastal GasLink pipeline project increased the project cost. Despite these challenges, the company expects its 2023 earnings to be higher than 2022. 

TC Energy based its guidance on upcoming projects that would commence operations in 2023. It also considered the long-term debt and higher floating rate interest, depreciation of assets, and lower contribution of Keystone. The company has been growing dividends for 22 years and could continue growing for over a decade. The company has a DRIP that can help you buy more TC Energy stocks. 

CT REIT

Diversifying into different sectors, CT REIT (TSX: CRT.UN) can give you exposure to retail real estate. It has no correlation to energy prices or global politics but is sensitive to property prices and borrowing costs.

CT REIT is the real estate arm of Canadian Tire, which has a resilient business, given its size. While the retailer’s stock is resilient, that of the REIT is falling as weakness in property prices has lowered the fair value of its property investments. 

However, CT REIT is relatively more stable than other commercial and retail REITs as 91.5% of its rent comes from Canadian Tire-occupied properties. Even if the retail industry is weak and occupancy is drying up due to shop closures, CT REIT has a better occupancy ratio. However, its biggest risk is too much dependence on Canadian Tire. If the parent goes into trouble, the REIT’s stock price could fall. 

As the recession engulfed the stock market, CT REIT stock slumped more than 5% in less than 10 days, inflating the distribution yield to 5.48%. Now is a good time to lock in a higher distribution yield.

Creating a $500 passive income

To earn $500/month in passive income, you can invest $500/month in stocks with a 5% average dividend yield and reinvest the same. Making this a habit can help you reach the $5,890 annual dividend, or $490/month, by 2037. You can accelerate this journey in the recession by investing more through the market crash. This way you can lock in higher yields and benefit from a rebound rally.