Passive Income: How to Earn Nearly $600 Per Month in Your TFSA Portfolio

Your Tax-Free Savings Account, or TFSA, is a fantastic tool for any passive-income needs. Obviously, nobody wants to pay taxes on their passive-income stream. Doing so means less money in your pocket. By withdrawing from a TFSA, you no longer have to worry abut that.

That being said, our goal with passive income isn’t to deplete our TFSA contributions. Ideally, we would use an investment that is capable of generating sustained, consistently high income on a monthly basis. Today, I have an exchange-traded fund (ETF) pick that could do just that.

Step #1: Fill up that TFSA

To unlock your passive-income potential, start by focusing on your TFSA. Why? Because Canadian dividends and interest income earned and withdrawn from a TFSA are 100% tax free.

Depending on your age, you might have up to $88,000 in contribution room if you’ve never invested in a TFSA before 2023. Each year, your TFSA limit goes up.

In 2023, the TFSA contribution limit jumped from $6,000 to $6,500. If you can swing it, go ahead and contribute that amount to make sure your TFSA is maxed out.

If you’re still some time away from needing passive income, then consider investing this $88,000 for growth and let it compound over many decades for an even better result!

Step #2: Buy a covered call ETF

Now, my own TFSA is all about low-cost index ETFs, but that’s because I’m not a passive-income investor. Right now, my personal focus is on growing my account.

If you’re all about high monthly income, a great alternative to index funds and individual dividend stocks is something like BMO Covered Call Canadian Banks ETF (TSX:ZWB).

Here’s the lowdown on ZWB. First, the ETF holds equal weights of the “Big Six” Canadian bank stocks, which already pay decent dividends of around 4-5%, not unlike a normal bank ETF.

To boost this further, ZWB sells covered call options rake in extra income. Basically, these covered call options turn future share price growth of the Big Six bank stocks into immediate cash. In other words, you’re trading potential long-term growth for consistent income.

Finally, the covered call premiums get bundled with the regular quarterly dividends from the Big Six bank stocks and are sent your way every month. That’s right; unlike dividend stocks ZWB pays out monthly. As of April 4, the ETF yields 8.24% and charges a 0.71% expense ratio.

Step #3: Calculate the payout

Assuming ZWB’s most recent March monthly distribution of $0.12 and current share price at the time of writing of $18.41 remained consistent moving forward, an investor who buys $88,000 worth of ZWB could expect the following monthly payout:

That being said, investing $88,000 into ZWB isn’t the best for diversification given that it only holds six Canadian bank stocks. Consider augmenting ZWB with additional Canadian dividend stock picks from other industries (and the Fool has some great suggestions for those below).