TFSA Passive Income: Earn $500/Month

TFSA users can earn $500 tax-free passive income every month over time by holding stocks with rock-steady dividend payments.

| More on:
A close up image of Canadian $20 Dollar bills

Image source: Getty Images

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.

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 Christopher Liew 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 »