How to Invest $550~ in Passive Income Every Month

A maxed-out TFSA combined with a covered call ETF can produce strong monthly tax-free passive income.

Tony Dong, MSc, CETF®

Tony turned a series of 2017 marijuana stock losses into a freelance career advocating for ETF investing. He currently holds a Master’s in Risk Management from Columbia University and is a Certified ETF Advisor (CETF®). Tony is the founder of ETF Portfolio Blueprint (etfportfolioblueprint.com) and the Lead ETF Analyst for ETF Central, a partnership between Trackinsight and the NYSE. His analysis has also been featured in publications like Kiplinger, 24/7 Wall St., U.S. News & World Report, TheStreet, and Benzinga.

Published April 11, 2023 1:00 pm EDT

Hey there, money-making enthusiast! Tired of your 9-5? Want to kick back, and watch the cash roll in without lifting a finger? Sure, you could try things like rental properties, but let’s be real – being a landlord requires some effort and a tonne of start-up capital.

So, let’s talk about a truly hands-off approach: making your Tax-Free Savings Account (TFSA) work for you! Using a TFSA to generate income is pretty sweet because the dividends are tax-free, and you can take the money out without any taxes, too. Now that’s what I call true passive income.

To turn your TFSA into a monthly money-maker, you need to pick the right assets. The good news? There are many Canadian exchange-traded funds (ETFs) perfect for the job. Let’s dive into one that might be just right for you with a high yield and an underlying portfolio of solid dividend stocks.

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Why use the TFSA?

Well, if you’re all about tax-free passive income, there’s no better option in my opinion. Withdrawing from taxable accounts or Registered Retirement Savings Plans (RRSP) means paying taxes, which eat into your hard-earned investment returns and passive income levels.

But with a TFSA, dividends, capital gains, and withdrawals are all tax-free. So, start maxing out your account ASAP. If you turned 18 in 2009 and haven’t contributed yet, you can add up to $88,000 in 2023. Every year, you’ll gain more contribution room, with $6,500 being the limit for 2023.

Now go out there and make that TFSA work for you (and the Fool has some great stock picks to help you grow that account).

Invest in the right ETF

To generate $550 monthly, or $6,600 annually, using a maxed-out $88,000 TFSA, we require an annual yield of around 7.5%. A regular portfolio of Canadian dividend stocks just won’t cut it here. The solution is to augment them with a derivatives strategy known as a covered call.

Meet BMO Canadian High Dividend Covered Call ETF (TSX: ZWC). Quite a mouthful, right? This nifty ETF holds around 100 Canadian dividend stocks and sells covered call options on them. In simple terms, the ETF is trading some potential future growth for more consistent, immediate income.

Now, the ZWC share price might not skyrocket or appreciate much over time, but it boasts a super high dividend yield paid monthly, making it perfect if you’re more into income than growth. Currently, ZWC’s rocking a 7.75% yield and a management expense ratio of 0.72%.

Calculating your payout

Assuming ZWC’s most recent March monthly distribution of $0.11 and current share price at time of writing of $17.52 remained consistent moving forward, an investor who buys $88,000 worth of ZWC could expect the following monthly payout: