Day traders make fast money by moving in and out of the stock market or doing multiple transactions on one stock on the same day. However, Tax-Free Savings Account (TFSA) investors risk full taxation of income or earnings by frequent or extensive buying and selling of stocks to earn quick bucks.
The TFSA was introduced in 2009 for Canadians to have an investment vehicle to build wealth other than the Registered Retirement Savings Plan (RRSP). Building wealth takes time, and the TFSA is one-of-kind because money growth and withdrawals are tax free.
Be a passive-income master
TFSA investors can become passive-income masters and achieve a goal like making a $500 monthly tax-free income. Pizza Pizza Royalty (TSX: PZA) and Diversified Royalty (TSX: DIV) are ideal holdings in the tax-advantaged account. Apart from the ultra-high yields, these royalty companies pay monthly dividends.
Pizza Pizza trades at $14.80 per share and pays a lucrative 6.08% dividend. Diversified’s share price is $2.77, while the dividend yield is a mouth-watering 8.66%. If you use the current stock prices and yields as parametres, you should own 3,485 shares of Pizza Pizza and 11,940 of Diversified to produce $500 in monthly tax-free income (total investment of $84.651.80).
The Canada Revenue Agency (CRA) sets the TFSA contribution limits every year. Thus, you can accumulate or buy shares up to the extent of the annual limit only ($6,500 in 2023). It would require maximizing your TFSA limits every year for the next 13 years to achieve $500 in monthly passive income.
However, it can be done in one sitting if your available contribution room is equivalent to the cumulative TFSA limit. Canadians who turned 18 in 2009 and haven’t opened a TFSA can contribute up to $88,000.
Recession-resistant business
Pizza Pizza outperforms the broader market year to date at +11.32% versus +0.17%. This $478.6 million company owns and franchises Pizza Pizza and Pizza 73 brands in Canada and collet royalty streams from 743 quick-service restaurants in the royalty pool.
The strong first-quarter (Q1) 2023 results indicate the business is hardly affected by or can overcome the challenging environment. In the three months that ended March 31, 2023, royalty income increased 15.3% year over year to $9.13 million.
Its chief executive officer (CEO) Paul Goddard describeds the pizza business as recession resistant. He added that management will continue its expansion plans, notwithstanding a potential economic downturn.
Back to normal operations
Diversified collects and grows royalty income from diverse multi-location businesses and franchisors. The current royalty pool includes Mr. Lube, Sutton, Mr. Mikes, Nurse Next Door, Oxford Learning Centres, and Stratus Building Solutions. AIR MILES was the seventh until Bank of Montreal recently bought the reward program business.
According to its president and CEO Sean Morrison, Q1 2023 has been Diversified’s best first quarter ever in terms of adjusted revenue and distributable cash. The former rose 23.8% year over year to $13.6 million, while the latter increased 22.2% to $8.8 million versus Q1 2022.
This $395.78 million multi-royalty corporation hasn’t missed paying a monthly dividend since December 2014.
Slow but sure process
TFSA investors can set monthly passive-income targets and go dividend investing. But because of annual contribution limits, achieving the goal is never quick but a slow but sure process.
