Passive Income: How to Make $500 Per Month Tax Free in 2023

Are you looking to earn $500 each month in passive income? Then include these two TSX stocks in your TFSA right now.

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Most individuals need to focus on creating multiple sources of income given the fickle nature of the global economy and elevated inflation levels. One low-cost way to generate passive income is by investing in high-yield dividend stocks that offer generous yields. Moreover, any income from dividends or capital gains will be exempt from taxes if the stocks are held in a TFSA (Tax-Free Savings Account).

The dividends earned can either be withdrawn or reinvested to expand your portfolio of income-generating companies. Alternatively, you can reinvest dividends to purchase additional units of the same stock, resulting in higher payments, or use the payout to further diversify your portfolio, given your risk-tolerance levels.

With these factors in mind, here are two quality TSX stocks that can help you earn $500 monthly in your TFSA.

Sun Life Financial stock

A blue-chip Canadian company, Sun Life Financial (TSX:SLF) has already returned 256% to investors since April 2013, after adjusting for dividends. Currently valued at a market cap of $38 billion, the TSX stock offers you a tasty dividend of 4.5%. A diversified financial services company, Sun Life provides savings, retirement, and pension products globally.

A weak macro environment dragged Sun Life’s assets under management lower by 8% year over year to $1.33 trillion in 2022. However, its insurance sales were up 18% at $4.3 billion.

Sun Life has increased adjusted earnings by 9% annually in the last five years. An expanding bottom line has enabled consistent dividend increases, which have risen by 100% in the last eight years.

With a payout ratio of 44%, Sun Life has enough flexibility to increase dividends or reinvest in growth opportunities, driving future cash flows higher. Priced at 10 times forward earnings, Sun Life is reasonably valued given its profit margins are forecast to increase by 15% in the next two years.

Northwest Healthcare REIT stock

A real estate investment trust (REIT), Northwest Healthcare (TSX:NWH.UN) pays investors a monthly dividend of $0.067 per share, translating to a yield of 9.6%. It acquires, owns, and manages several healthcare properties globally, providing investors with exposure to a recession-resistant sector.

Valued at a market cap of $2 billion, Northwest Healthcare has 233 income-generating properties located in the Americas, Europe, Australia, and New Zealand. Currently trading 42% below all-time highs, the TSX stock has pulled back, as investors are worried about rising interest rates that negatively impact companies with high debt levels.

But Bay Street remains bullish on Northwest Healthcare stock and expects shares to gain 31% in the next 12 months. After accounting for its dividend yield, total returns will be closer to 40%.

The Foolish takeaway

Sun Life Financial$64.94654$0.72$471Quarterly
Northwest Healthcare$8.295,096$0.067$341Monthly

For you to earn $500 each month in your TFSA, you need to invest a total of $84,500 distributed equally between the two TSX stocks. As dividend payouts are not a guarantee, investors need to identify similar stocks with strong fundamentals and stable cash flows to create a diversified portfolio of dividend stocks that can be held in a TFSA. Please note that we at the Fool prefer a more diversified portfolio and don’t recommend putting such a large sum into only two stocks. Instead, we suggest you mix and match a diverse group of dividend-paying stocks to achieve your target yield.

If your portfolio of stocks raises dividends by 7% annually, your payout will double in 10 years.

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 Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool recommends NorthWest Healthcare Properties Real Estate Investment Trust. The Motley Fool has a disclosure policy.

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