Tax-Free Savings Account (TFSA) contribution limits are the same for everyone, and the tax advantages apply to all users. However, investment income differs depending on utilization and the rate of return of assets held inside the account.
Aiming for $500 in passive income every month isn’t unrealistic, but it would take time to get there. If you’re purchasing a dividend stock, the investment amount must be $150,000, and the yield is 4.0%. Unfortunately, because of fixed contribution limits, you can’t make an upfront investment of $150,000 in a TFSA.
Maximum cumulative limit
Assuming you’re eligible to open a TFSA but have not done so, the maximum cumulative limit in 2023 is $88,000. At that amount and a 4% yield, the monthly income is $293.33 — still short of $500. However, a higher rate of return, or 6.81%, will produce monthly earnings of $500.13.
High-yield healthcare stock
Many TSX stocks, including Extendicare (TSX: EXE), pay higher-than-average dividends. At $7.14 per share, the yield is 6.82%. Given the stock price and yield, following the assumptions above, you should accumulate around 12,325 shares to produce $500.13 monthly.
If the investment vehicle is the TFSA, where overcontribution is not allowed, it will take around 13.5 years (consistent $6,500 contribution yearly) to accomplish the objective.
Extendicare is a reliable passive-income provider, as evidenced by its dividend track record. The $602.27 million company provides long-term-care (LTC) and home-healthcare services to seniors in Canada. It hasn’t missed paying monthly dividends since 2013. Performance-wise, the healthcare stock outperforms the broader market year to date at +12.83% versus +2.2%.
All aspects of Extendicare’s operations, including funding of LTC homes, are controlled by provincial legislation and regulations. According to Deloitte, many baby boomers in Canada turned 75 in 2021, and the aging population is pushing demand for LTC and home care. Extendicare is well positioned to meet the needs of seniors and prevent an elderly crisis.
Shorter time frame
A cheaper but lucrative investment option is Diversified Royalty (TSX: DIV). At only $2.83 per share (-1.23% year to date), the dividend yield is a mouth-watering 8.51%.
For this high-yield stock, the investment amount ($70,505) and time frame (10.85%) to hit $500 tax-free passive income is lower and shorter. It follows the same assumption that you will contribute $6,500 to your TFSA every year.
The $404.35 million multi-royalty corporation owns the trademarks of Mr. Lube, Mr. Mikes, Nurse Next Door, Oxford Learning Centres, Sutton, and Stratus Building Solutions. It collects royalties from the six royalty partners. The rock-steady monthly dividend payouts since November 2014 should lend confidence to invest in the stock.
In the first quarter of 2023, adjusted revenue and royalty income rose 23.9% and 27.1% year over year to $13.62 million and $12.21 million. Its president and chief executive officer Sean Morrison said the adjusted revenue and distributable cash were Diversified’s best in a first quarter.
Salient feature
Canadian residents aged 18 or older should have a TFSA and take full advantage of the benefits, particularly the 100% tax-free money growth. Because of this salient feature, you can build wealth or generate the desired passive-income stream over time.
Since TFSA contribution amounts are indexed to inflation, the limit could increase due to higher adjustments. The limit rose to $6,500 in 2023 because of high inflation.
