No matter the life stage, a Tax-Free Savings Account (TFSA) can be an excellent portfolio option. Whether it’s to put aside savings for your future retirement or pay for your child’s education in the next few years, the TFSA can create tax-free income for any part of your life.
However, it’s perhaps less about the future and more about right now. Investors continue to seek out dividend stocks for their TFSA to help offset rising costs and interest rates. But what if I told you that instead of putting a ton of cash in all at once, you could drip feed and create an immense amount of passive income each month tax free?
How it works
First off, investors need to have a TFSA for this option. If you want tax-free income that you can take out at any time, the TFSA is the way to go. While there are limits on contributing to your TFSA, you can take out everything at any time.
What investors will then want to do is create a budget. This will help identify how much money from your paycheque can be used for monthly investments. This should be contributed to your TFSA (while staying within your limits) every month, putting that cash aside until a stock on your watchlist is a good price.
Now, what kind of stock should you choose?
Consider a royalty stock
If you want cash every month, you’ll need a monthly, passive-income dividend stock. And some of the safest out there are royalty stocks.
Royalty stocks allow investors to collect revenue generated by a business or industry. While there are a lot of industries to choose from, consider The Keg Royalties Income Fund (TSX: KEG.UN) as a strong option. Restaurant royalty funds allow investors to invest in a company that holds ownership stakes in multiple restaurants and, in this case, the Keg chains.
The fund works by having restaurants agree to pay out a portion of revenue in exchange for investment capital. A port of that revenue will then be paid out to investors, usually in the form of dividends. In the case of the Keg fund, investors can bring in a 7.32% dividend yield as of writing!
How much you could receive
Let’s say you’re an investor who can afford to put $500 away each month. That’s $6,000 by the end of the year. You then invest that cash into the Keg on an annual basis, reinvesting your dividends as well. The Keg has grown its dividend by a compound annual growth rate (CAGR) of 1.73%. The share price has grown at a CAGR of 9.82% since 2020 after the company recovered from the crash during March 2020. So, let’s see how much investors could earn reinvesting over the next decade in this stock.
| Year | Share Price | Shares Owned | Annual Dividend Per Share | Annual Dividend | After DRIP Value | Annual Contribution | Year End Stock Price | New Shares Purchased | Year End Shares Owned | New Balance |
| 1 | $15.50 | 387 | $1.14 | $441.18 | $6,439.68 | $6,000 | $17.02 | 378.4 | 765.4 | $12,880.05 |
| 2 | $17.02 | 765.4 | $1.16 | $872.56 | $13,899.66 | $6,000 | $18.69 | 367.71 | 1133.11 | $20,772.16 |
| 3 | $18.69 | 1133.11 | $1.18 | $1,337.06 | $22,109.23 | $6,000 | $20.53 | 357.38 | 1490.49 | $29,446.24 |
| 4 | $20.53 | 1490.49 | $1.20 | $1,788.59 | $31,234.83 | $6,000 | $22.55 | 345.39 | 1835.88 | $39,023.37 |
| 5 | $22.55 | 1835.88 | $1.22 | $2,239.77 | $41,263.14 | $6,000 | $24.76 | 332.79 | 2168.67 | $49,503.02 |
| 6 | $24.76 | 2168.67 | $1.24 | $2,689.15 | $52,192.17 | $6,000 | $27.19 | 319.57 | 2488.24 | $60,881.28 |
| 7 | $27.19 | 2488.24 | $1.26 | $3,135.18 | $64,016.46 | $6,000 | $29.86 | 305.79 | 2794.04 | $73,147.35 |
| 8 | $29.86 | 2794.04 | $1.29 | $3,604.31 | $76,751.66 | $6,000 | $32.79 | 292.9 | 3086.94 | $86,355.85 |
| 9 | $32.79 | 3086.94 | $1.31 | $4,043.89 | $90,399.74 | $6,000 | $36.01 | 278.91 | 3365.85 | $100,443.29 |
| 10 | $36.01 | 3365.85 | $1.33 | $4,476.58 | $104,919.87 | $6,000 | $39.55 | 264.89 | 3630.74 | $115,396.27 |
By year 10, you’ll receive $4,476.58 in passive income annually. This comes to about $373 each month! Plus, you’ll have gained strong returns from your investment, making it well worth the wait.
