How to Earn Monthly Income That the CRA Can’t Tax

If you want monthly income, better make sure it lasts! Here’s how to make it happen and a stock to get you there.

Amy Legate-Wolfe

Author Bio Amy became interested in investing in 2018 after having her first daughter. After receiving a masters degree in journalism from Western University, she became frustrated that the finance industry remained a confusing place for Canadians like her: new parents, millennials, and other young people who needed to understand their finances. Now, Amy focuses on tech companies and renewable energy for growth opportunities, coupling that with long-term investing strategies and equities. She also provides investors with a daily newsletter, Canada Stock Digest, for daily market updates. Her work can also be found at Canada's National Observer, where she writes on the business side of climate action. Before joining Motley Fool Canada, Amy wrote for major news organizations including HuffPost, CTVNews.ca, and CBC. When she’s not researching investing strategies, Amy’s time is pretty much monopolized by her two wild daughters, but in what little spare time she has she loves to do yoga, go on walks with her dog, and travel with her husband. Social Media Follow Amy on LinkedIn and Canada Stock Digest. Favorite Investment Quote “October: This is one of the particularly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” – Mark Twain

Published October 4, 2023 9:30 pm EDT

Investing in dividend stocks on the TSX can be a reliable strategy for creating a steady stream of monthly income. Canadian investors, in particular, have a unique tool at their disposal, the Tax-Free Savings Account (TFSA), which offers significant tax advantages.

In this article, we will explore how to harness the potential of dividend stocks on the TSX today to generate monthly income and why the TFSA is the perfect vehicle for this purpose.

The power of dividend stocks

Dividend stocks are shares in companies that distribute a portion of their profits to shareholders in the form of dividends. These stocks are known for their income-generating potential, making them an attractive choice for investors seeking monthly income. The TSX today boasts a variety of dividend-paying companies across different sectors, providing ample options for investors.

To create a monthly income stream from dividend stocks, consider the following steps:

Research and Diversify: Start by researching and identifying reliable dividend-paying stocks on the TSX. Diversify your portfolio across various sectors to reduce risk. Look for companies with a history of consistent dividend payments.
Seek High Dividend Yields: Pay attention to the dividend yield, which is the annual dividend payment divided by the stock’s current price. Higher yields can provide more substantial monthly income, but be cautious of excessively high yields, which could be unsustainable.
Invest Regularly: Invest regularly, whether it’s monthly, quarterly, or annually, to benefit from dollar-cost averaging. This strategy helps mitigate the impact of market volatility on your investments.
Reinvest Dividends: Consider reinvesting your dividends to purchase more shares of the same stock or different dividend-paying stocks. This practice can accelerate your income growth through compounding.

Why the TFSA is the perfect tool

The TFSA is a tax-advantaged savings and investment account available to Canadian residents. One of its most significant advantages is that any income generated within the account, whether from dividends, interest, or capital gains, is entirely tax-free. This unique feature makes it an excellent choice for investors seeking to create monthly income through dividend stocks.

Here’s why the TFSA is the perfect tool:

Tax-Free Income: As previously mentioned, any income earned within a TFSA is exempt from taxation. This includes both the dividends you receive and any capital gains realized when you sell your dividend stocks. The Canada Revenue Agency (CRA) cannot tax your TFSA earnings.
Flexibility: TFSAs offer flexibility in terms of investment choices. You can hold a wide range of assets within your TFSA, including stocks, bonds, mutual funds, and more. This allows you to tailor your portfolio to your income goals.
No Contribution Age Limit: Unlike Registered Retirement Savings Plans (RRSPs), TFSAs have no age limit for contributions, beyond being 18 when you start. You can continue contributing to your TFSA even after you reach retirement age, making it a valuable tool for creating income in retirement.

A stock to consider

In the world of investing, there are few things more attractive than receiving a consistent stream of tax-free income every month. For those seeking reliable dividends, Slate Grocery REIT (TSX: SGR.UN) emerges as an exceptional option. With a dividend yield of 10.5%, shares down 21% in the last year, and trading at a modest 11.1 times earnings, this real estate investment trust (REIT) is poised to offer not only impressive income but also substantial potential for capital appreciation.

One might wonder why the shares of Slate Grocery REIT are down 21% in the last year. While this may seem like a concerning statistic, savvy investors recognize that short-term market fluctuations can present excellent buying opportunities. In the case of Slate Grocery REIT, the dip in share price offers investors the potential for larger returns in the long run.

Trading at just 11.1 times earnings, Slate Grocery REIT appears to be undervalued relative to its income-generating potential. The lower the price-to-earnings (P/E) ratio, the more attractively priced a stock may be. Investors seeking a combination of income and growth often look for undervalued assets, and Slate Grocery REIT fits this criterion. So certainly consider it on the TSX today.