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!

| More on:
Various Canadian dollars in gray pants pocket

Image source: Getty Images

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

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.

More on Dividend Stocks

Dividend Stocks

Dividend Investors: Top Canadian Utility Stocks for September 2023

Here are two of the best dividend-paying Canadian utility stocks you can buy at a bargain in September 2023.

Read more »

money cash dividends
Dividend Stocks

Start Making Passive Income Immediately With This 6% Dividend Stock

Are you looking to earn passive income as early as next month? This dividend stock is a buy at its…

Read more »

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Dividend Stocks

2 Wealthsimple Stocks With Market-Beating Potential

Passive investors, including beginners, can purchase two highly recommended Wealthsimple stocks with market-beating potential.

Read more »

Dollar symbol and Canadian flag on keyboard
Dividend Stocks

Dividend Investors: 2 Oversold Canadian Stocks With Great Yields

Top TSX dividend stocks are on sale.

Read more »

Target. Stand out from the crowd
Dividend Stocks

TFSA Pension: Top Stocks to Target Total Returns

This strategy can help investors build retirement wealth.

Read more »

Profit dial turned up to maximum
Dividend Stocks

RRSP Investors: 2 Top TSX Stocks to Buy for Total Returns

These top TSX stocks look cheap today.

Read more »

Dividend Stocks

The Top Canadian REITs to Buy in September 2023

These two top Canadian REITs are highly reliable and offer significant long-term potential, making them some of the best to…

Read more »

dividends grow over time
Dividend Stocks

Where to Invest $500 in September 2023

Determining where to invest can be a daunting ask for some new investors. Fortunately, these two picks can make that…

Read more »