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

Creating multiple passive-income streams is the ideal way to supercharge your retirement plans and build long-term wealth. One way to create a recurring and predictable flow of passive income is by investing in quality dividend stocks.

Moreover, if you hold these stocks in a TFSA (Tax-Free Savings Account), any returns in the form of dividends and capital gains will be sheltered from federal and provincial taxes.

Here are three such monthly dividend stocks you can hold in May 2023.

Keyera stock

An energy infrastructure company, Keyera (TSX:KEY), currently offers you a dividend yield of 6.1%. It pays investors a monthly dividend of $0.16 per share and is also priced at a discount of 13% to consensus price target estimates.

While Keyera is part of a cyclical industry, it has managed to increase distributable cash flow by 7% annually since 2008. In this period, its dividends per share have increased by 6% each year. Keyera aims to keep its payout ratio in the range between 50% and 70%, allowing it to keep increasing dividends, improve its balance sheet and reinvest in capital expenditures going forward.

Keyera has allocated between $200 million and $240 million towards growth capital expenditures this year, which should drive future cash flows higher. The TSX stock is priced at 15 times forward earnings, which is quite reasonable given its adjusted earnings are forecast to rise by almost 40% this year.

Diversified Royalty stock

A small-cap stock with a tasty dividend yield, Diversified Royalty (TSX:DIV) is engaged in the acquisition of royalties from multi-location businesses and franchisors. It pays shareholders a monthly dividend of $0.02 per share, indicating a forward yield of almost 9%.

In the first quarter (Q1) of 2023, the company’s largest royalty partner Mr. Lube increased same-store sales by 17.6% year over year. Other business streams, such as Mr. Mikes and Oxford, also increased same-store sales by 30.5% and 15.8%, respectively.

Diversified Royalty now has seven royalty streams, allowing it to increase sales from $45.2 million in 2022 to an estimated $57 million in 2023. DIV stock is also priced at a discount of 30% to consensus price target estimates.

Pizza Pizza Royalty stock

The final dividend stock on my list is Pizza Pizza Royalty (TSX:PZA). In the last 10 years, the TSX stock has more than doubled investor returns after adjusting for dividends. Despite these inflation-beating gains, Pizza Pizza offers you a dividend yield of 6.2%.

The company is Canada’s largest pizza franchise, with more than 730 outlets in the country. It recently opened two outlets in Mexico and now aims to gain traction in a much bigger North American market.

Pizza Pizza confirmed it would open five restaurants in Mexico with an aggressive expansion plan in 2024, driving cash flows and dividends higher.

The Foolish takeaway

In order for you to earn $500 per month in your TFSA through dividends, you need to invest a total of $88,888 distributed equally in these three TSX stocks. But the cumulative TFSA contribution limit stands at $88,000 in 2023, which means you might have to wait another year for the limit to increase or buy stocks with higher dividend yields.

Moreover, as dividends are not guaranteed, you need to identify similar stocks and further diversify your portfolio, which will lower investment risk.