TFSA Passive Income: Earn $500/Month

The stock market is wavering again after the U.S. Fed hiked interest rates by another 25 basis points to 5%. The Fed chair hinted at a possible pause in rate hikes to give interest rates time to impact inflation but did not rule out another rate hike. In the 2008 crisis, prolonged high inflation and interest rates led to delinquencies and stressed banks. At times like these, passive income stocks have kept many investors motivated. 

Time to build TFSA passive income 

The 2008 financial crisis led to the launch of the Tax-Free Savings Account (TFSA) in 2009 to encourage investing habits among Canadians. Those who lived through the 2008 crisis know that was a great time to invest in resilient dividend stocks and secure a source of passive income. 

A $5,000 investment in Enbridge (TSX: ENB) in April 2009 would have brought you 270 shares that gave $199 in annual dividends. Today, these shares pay $1,027 in annual passive income ($85/month), and the portfolio value has increased to $14,445. 

Enbridge’s dividend growth consistency and passive investing have prepared investors for a crisis. The current market scenario has created a similar opportunity to build a TFSA passive income and prepare in advance for difficult times. 

How to build TFSA passive income 

To build a robust passive income portfolio, diversify your investments across stocks that react differently to the same situation. For instance, the high-interest rate environment has stressed stocks of companies with high debt, like banks and REITs. But telecom and energy companies are doing well. However, small-cap energy and utility companies could feel the pressure as their scale of operations is not large enough to make them resilient to the macro environment. 

A dividend stock to buy and hold for 10 years 

In times like these, investors are safer to invest in large-cap stocks to lock in a passive income. While Enbridge is still a good passive income stock even today, Telus Communications (TSX: T) is another stock to consider. It has strong cash flow coming from subscriptions. Last year, the telco finished building its 5G infrastructure. 

While the toll rate Enbridge charges for transmitting oil and gas via its pipelines is regulated, Telus’ telecom rates are not regulated. Telus is unaffected by commodity and oil prices. Moreover, with three telecom players owning more than 80% market share, competition is not fierce. The three players do not engage in a price war as each has to sustain its capital costs. The growing role of the internet in our daily lives makes telecom stocks an attractive passive income investment. 

While other dividend stocks, including Enbridge, have slowed their dividend growth rate, Telus maintains its dividend growth at 7%–10%. If you invest $5,000 now, you can buy 178 shares of Telus Communications, which can pay you $253.70 in annual dividends. If the company continues its dividend growth rate, these 178 shares could give you $466 in annual passive income after 10 years. 

How to earn $500/month in TFSA passive income

To earn $500 in monthly passive income, you should regularly invest in dividend aristocrats like the above two stocks and secure a 6% yield. 

You can accelerate the process by reinvesting the dividend income in higher-yield stocks. For instance, you can reinvest Telus’s $253.70 dividend income in a high-yield stock like True North Commercial REIT. It is a high-risk stock that has halved its distributions. But the stock price has also halved, bringing the yield to 10.5%. 

A $253.70 investment can buy you 90 shares of the commercial REIT, which would pay $26.80 in annual passive income if there are no more distribution cuts. By reinvesting the dividend, you can enhance your dividend yield. 

If you keep the yield of your dividend portfolio at 6%, your TFSA could start providing $500 in monthly passive income from the thirteenth year.