Generating tax-free passive income, even for a lifetime, is easy through a Tax-Free Savings Account (TFSA). If you have a desired amount in mind, achieving it would depend on the investment type and rate of return. Assuming the target is $500 monthly, the investment amount and rate of return must be $150,000 and 4%, respectively.
You can achieve this goal in a TFSA but can’t make a large upfront investment because of the annual contribution limits. Though by contributing the maximum limit yearly ($6,500 in 2023), it would take a little over 23 years to generate $500 in tax-free passive income monthly.
Most TFSA investors hold income-producing assets like dividend stocks or real estate investment trusts (REITs). Northland Power (TSX: NPI) and First Capital REIT (TSX: FCR.UN) are two options that fit a dividend strategy. Besides the attractive dividend yields, both companies pay monthly dividends.
Since the average dividend yield is 5.41%, the period shortens to 17.5 years in a TFSA. You need to accumulate 2,870 shares of the utility stock and 2,960 shares for the REIT on a total investment of $113,612.60 within the timeframe.
A growth-oriented clean energy producer
Northland Power is one of Canada’s growth-oriented independent power producers. The $6.2 billion utility company owns and operates renewable assets (wind and solar) and infrastructure plus efficient natural gas facilities. In Colombia, it owns 99% of Empresa de Energía de Boyacá (EBSA), a premier regulated utility firm.
Apart from North America and Latin America, Northland Power has clean and green power infrastructure assets in Europe and Asia. Management is forward looking and expects substantial adjusted earnings before interest, taxes, depreciation, and amortization growth by 2027 with the completion of two offshore wind projects and one battery storage project.
Northland is gearing up for the global energy transition. The plan is to be selective and pursue projects that meet its strategic objectives and targeted returns. The current operating generating capacity is 3 gigawatts (GW) but with the potential to increase to 20 GW due to early to mid-stage development opportunities.
If you invest today, the utility stock trades at $24.58 per share (-32.29% year to date) and pays a 4.88% dividend.
Resilient lessor
First Capital displays resiliency amid a challenging environment, including a depressed real estate market. The $3.1 billion REIT owns and operates grocery-anchored and mixed-use properties in super urban and top-tier suburban areas with thriving neighborhoods.
In the first half of 2023, net income jumped 736.8% to $19.7 million versus the same period in 2022. Its president and chief executive officer Adam Paul said the high-quality, grocery-anchored retail portfolio continues to deliver solid results. For the second quarter of 2023, he noted the 7.6% year-over-year growth in funds flow from operations and strong leasing activity (14% lease renewal spreads). The occupancy rate is 95.9%.
At $14.55 per share (-10.62% year to date), you can partake in the lucrative 5.94% dividend yield.
Powerful savings tool
The TFSA is a powerful tool for reaching savings goals, including generating tax-free monthly passive income. While the annual contribution limits look small, your balance grows significantly with future contributions and dividend reinvesting. TFSA investors likewise benefit from tax-free withdrawals.
