Canada seems to have avoided a recession after witnessing 40-year high inflation and a decade-high interest rate of 5%. The last two years gave a reality check to those who left their investment portfolio vulnerable to high-risk growth stocks. The Tax-Free Savings Account (TFSA) portfolio, after minting money in 2021 on the tech stock rally, plunged in 2022 and 2023. These two years of bearish momentum made investors cautious and shifted their focus to passive income. To revive investor confidence, the Canada Revenue Agency (CRA) increased the TFSA contribution limit for two years in a row after keeping it stagnant for four years.
Adding passive income to your TFSA portfolio
The TFSA contribution limit in 2024 is $7,000. If you could lock in a 6% annual dividend yield that grows with inflation (3%) and gives monthly payouts, you could earn $88/month in 11 years. A one-time investment of $7,000 can compound into a 15% annual payout of $1,059 in 11 years. And your invested amount also doubles to more than $14,000.
One stock that could give you such returns is CT REIT (TSX:CRT.UN), the real estate investment trust of Canadian Tire. Canadian REITs are the most preferred option for monthly passive income because of the tax benefits they enjoy. REITs have to distribute a significant portion of their taxable income as distributions to maintain their investment trust status. And CT REIT distributes 100% of its taxable income.
As REITs don’t pay income tax on distributions, their payouts are higher. These distributions are taxable in the hands of the unitholder. However, you can avoid paying tax on these payouts by buying REITs through the TFSA. It allows your investment to grow tax-free and even make withdrawals tax-free.
How to earn $88 per month in passive income
| Year | Annual Investment | CT REIT DRIP Shares | CT REIT Share count | CT REIT Dividend per share (3% CAGR) | Total dividend |
| 2024 | $7,000.00 | 479.0 | $0.90 | $431.10 | |
| 2025 | $431.10 | 26.0 | 505.0 | $0.93 | $468.14 |
| 2026 | $468.14 | 28.0 | 533.0 | $0.95 | $508.91 |
| 2027 | $508.91 | 31.0 | 564.0 | $0.98 | $554.67 |
| 2028 | $554.67 | 33.0 | 597.0 | $1.01 | $604.74 |
| 2029 | $604.74 | 37.0 | 634.0 | $1.04 | $661.48 |
| 2030 | $661.48 | 40.0 | 674.0 | $1.07 | $724.31 |
| 2031 | $724.31 | 44.0 | 718.0 | $1.11 | $794.74 |
| 2032 | $794.74 | 48.0 | 766.0 | $1.14 | $873.31 |
| 2033 | $873.31 | 52.0 | 818.0 | $1.17 | $960.57 |
| 2034 | $960.57 | 58.0 | 876.0 | $1.21 | $1,059.54 |
CT REIT stock is trading at a 12% discount from its average trading price of $16.50, creating an opportune time to lock in an annual distribution yield of 6%. If you invest $7,000 now, you can buy 479 shares of CT REIT. They will start paying you $35.85 in passive income from next month onwards.
CT REIT has been growing its distribution annually at an average rate of 3.5% for the last 10 years. Its distribution growth is sustainable as it increases cash flow by increasing rent by 1.5% and adding new income-generating properties to its portfolio.
If you opt for CT REIT’s dividend reinvestment plan (DRIP), it will use the distribution amount to buy more units without brokerage fees and increase your unit count. Assuming the average stock price of $16.50, $431 in passive income in 2024 could buy you 26 DRIP shares. If the REIT maintains its 3% distribution growth rate, its 2025 annual distribution could be $0.93 per unit. Your passive income per share and share count are both growing. This dual growth could compound your share count to 876 by 2034 and monthly passive income to $88 ($1059/12).
Investor takeaway
An $88 monthly passive income might not look big, but you can build many such sources. If you have 10 such sources, an amount of $880 per month can take care of your basic necessities of utilities and energy bills.
You can use this passive income to support you through different life events like unemployment, retirement, or a career break – or to complement active income during high inflation.
