Passive Income: How to Make $586 Per Month Tax Free

Creating passive income of this magnitude will take time, but it will be well worth the wait!

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Passive income remains the top focus of investors these days. While there are certainly many stocks that will offer major growth in the years to come, that does little to help your pockets right now. That is why today, I’m going to focus on how to earn passive income — right now and for life, and all tax free.

Get the right account

It’s pretty clear that if you’re going to earn passive income tax free, you’re going to need a Tax-Free Savings Account (TFSA). Since 2009, the TFSA has added more and more contribution room, with this year totaling $88,000 if you were at least 18 in 2009 and have never contributed to the account.

Creating $586 every month is going to take a major investment. That is why you should consider purchasing shares in a solid company with high dividends and work your way up to $586 per month.

To do that, you’re going to have to figure out how much you can afford to invest now as well as how much you can afford to invest on a consistent, annual basis. Then reinvest your dividend income as you go. A financial advisor can certainly help you come up with the numbers that fit your budget.

A monthly recommendation

Now, if you’re going to aim for monthly passive income of $586, that means finding a monthly dividend stock. A solid option I would consider that remains incredibly cheap is Northland Power (TSX:NPI). It’s especially good for those looking into the renewable energy sector. It provides passive income each month, with a dividend yield currently at 4.03%.

As of writing, shares of Northland stock are down 24% in the last year. Those shares are still up by 56% in the last decade after the major drop it’s seen. That still provides a compound annual growth rate (CAGR) of 4.32% to remain conservative. Meanwhile, its dividend has seen a CAGR of 1.06% in that time.

Bottom line

Now for the fun part. To create $586 monthly, that means coming up with $7,032 in annual passive income. Let’s say you have $25,000 to put towards NPI stock today. We’ll then reinvest the dividends from this and add $6,000 each year to your TFSA, which is usually the contribution limit or around there. We’ll then hold it for 30 years.

YearShares OwnedAnnual Dividend Per ShareAnnual DividendAfter DRIP ValueAnnual ContributionYear End Shares OwnedYear End Stock PriceNew Balance
1862$1.20$1,034.4$26,034.40$6,000.001,058$30.59$32,034.40
21,058$1.21$1,280.18$33,314.58$6,000.001,246$31.91$39,314.58
31,246$1.22$1,520.56$40,834.74$6,000.001,426$33.29$46,834.76
41,426$1.24$1,768.53$48,603.29$6,000.001,599$34.72$54,603.29
51,599$1.25$1,998.75$56,602.04$6,000.001,764$36.22$62,602.04
61,764$1.26$2,223$64,825.50$6,000.001,923$37.79$70,825.50
71,923$1.28$2,461.44$73,286.94$6,000.002,075$39.42$79,286.94
82,075$1.29$2,676.75$81,963.69$6,000.002,221$41.12$87,963.69
92,221$1.30$2,887.30$90,850.99$6,000.002,361$42.90$96,850.99
102,361$1.32$3,116.52$99,967.51$6,000.002,495$44.75$105,967.51
112,495$1.33$3,318.35$109,285.86$6,000.002,624$46.69$115,285.86
122,624$1.35$3,542.40$118,828.26$6,000.002,747$48.71$124,828.26
132,747$1.36$3,735.92$128,564.18$6,000.002,865$50.81$134,564.18
142,865$1.38$3,953.7$138,517.88$6,000.002,978$53.00$144,517.88
152,978$1.39$4,139.42$148,657.3$6,000.003,086$55.29$154,657.3
163,086$1.40$4,320.40$158,977.7$6,000.003,190$57.68$164,977.7
173,190$1.42$4,529.80$169,507.5$6,000.003,289$60.17$175,507.5
183,289$1.43$4,703.27$180,210.77$6,000.003,384$62.77$186,210.77
193,384$1.45$4,906.80$191,117.57$6,000.003,475$65.49$197,117.57
203,475$1.47$5,108.25$202,225.82$6,000.003,563$68.31$208,225.82
213,563$1.49$5,308.87$213,534.69$6,000.003,647$71.26$219,534.69
223,647$1.50$5,470.50$225,005.19$6,000.003,727$74.34$231,005.19
233,727$1.52$5,665.04$236,670.23$6,000.003,804$77.55$242,670.23
243,804$1.53$5,820.12$248,490.35$6,000.003,878$80.90$254,490.35
253,878$1.55$6,010.90$260,501.25$6,000.003,949$84.39$266,501.25
263,949$1.57$6,199.93$272,701.18$6,000.004,017$88.04$278,701.18
274,017$1.58$6,346.86$285,048.04$6,000.004,082$91.84$291,048.04
284,082$1.60$6,531.20$297,579.24$6,000.004,144$95.81$303,579.24
294,144$1.62$6,713.28$310,292.52$6,000.004,204$99.95$316,292.52
304,204$1.63$6,852.52$323,145.04$6,000.004,262$104.26$329,145.04

After reaching 4,262 shares, you’ll be at a dividend of $1.65 in annual passive income. This comes to $7,032.30, which gives you that $586 each and every month.

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 Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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