Passive Income: How to Make $215.56 Per Month Tax Free

Passive income is easy to make; all it takes is consistency and contributions, and, of course, the right dividend stock to get you there.

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If you’re an investor looking to make passive income right now, join the club. The entire country, if not the world, is looking for a quick way to make cash. It’s why growth stocks grew, only to fall when Canadian investors actually needed that cash. It’s also led to the rise in side hustles, quick-paying schemes, and strapped-for-cash Canadians.

Let’s look at an easy way to make passive income. But here’s the bad news: this is a long-term approach. That being said, the good news is you’re going to make far more than you ever thought possible.

Consistency is key

If you’re looking to make long-term passive income or any for that matter, consistency is key. You need to come up with an amount you can put aside each and every month ideally, even every paycheque if you can manage that.

That means you’re going to need a budget. By going over a budget, you’ll need to identify every single item you’re going to need to spend in a month. From there, what’s left? That amount should be a consistent amount you know you’ll be able to put aside each paycheque.

Then treat it as a bill payment! Create consistent, automated contributions that will go straight into an investing account like the Tax-Free Savings Account (TFSA). The next part? Start investing.

Create cash and create more

Now that you’ve got cash flowing into a TFSA, you need to invest it if you’re hoping to create long-term passive income. Let’s say you’re able to put aside $300 each month. Alone, that would come to $3,600 every year. And that’s great! But to create passive income that lasts, you’ll want to invest it.

I would recommend companies that have a long history of dividend increases and stable growth. For that consider the Big Six banks. Companies such as Bank of Montreal (TSX:BMO) are great options right now. They’re showing signs of recovery, have increased their dividend recently, and also have growth opportunities in the United States.

With BMO stock you can grab a dividend yield of 5.29% as of writing while it still trades at just 20.34 times earnings. Yet shares are still down 11.5% in the last year, allowing you to get in while you can still see strong returns. From there, you’re going to want to reinvest all the dividends you bring in. So, let’s look at that next.

Think long term

It can be really tempting to take out the cash you’ve earned through your TFSA dividend passive income. However, I urge you to consider putting that aside for reinvesting instead. This is how you can create the ultimate amount of passive income.

In the case of BMO stock, let’s look at a projection for the next two years. You start out with that $3,600 investment, adding another $3,600 each year. You see shares rise to 52-week highs the first year, then continue by rising 7% the year after. In that time you also see dividends increase by 7% each year. Here is what that could look like by reinvesting income.

YearShare PriceShares OwnedShare ValueAnnual Dividend Per ShareAnnual DividendAfter DRIP ValueAnnual ContributionYear End Stock PriceNew Shares PurchasedYear End Shares OwnedNew Balance
1$115.0031.00$3,565.00$6.04$187.24$3,752.24$3,600.00$138.0026.0057.00$7,866
2$138.0057.00$7,866$6.46$368.22$8,234.22$3,600.00$147.6624.0081.00$11,960.46
3$147.6681.00$11,960.46$6.92$560.52$12,520.98$3,600.00$158.0022.00103.00$16,274

Now by the end of the third year, starting with $3,600 and ending with three more contributions, you will have invested a total of $14,400. Your portfolio would be worth $16,274 from dividends reinvested! You now have returns of $1,874, with dividend income of $712.76. In total, that’s passive income of $2,586.76 at the end of three years! That comes to monthly passive income of $215.56. That’s not bad for just a couple of years of consistency.

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 Amy Legate-Wolfe 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.

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