TFSA Investors: Build a Tax-Free Monthly Passive Income Portfolio With Just $20,000

It’s essential to use the benefits offered by registered accounts such as the TFSA (Tax-Free Savings Account) to generate wealth and achieve financial independence at an accelerated pace. All qualified investments held in the TFSA are exempt from taxes, making it an ideal account for growing wealth over time.

While you can use the TFSA to hold asset classes such as bonds, stocks, or mutual funds, investors can consider holding quality dividend stocks in the account. The best dividend stocks offer you a stable passive-income stream and the possibility to increase returns via capital gains. As the maximum cumulative TFSA contribution limit in 2024 has risen to $95,000, let’s see how you can build a monthly passive income portfolio with just $20,000.

Hold dividend-growth stocks in a TFSA

A low-cost way to begin a recurring passive-income stream is to invest in dividend stocks such as Exchange Income (TSX: EIF). Valued at $2.14 billion by market cap, Exchange Income is an acquisition-oriented company focused on sectors such as aerospace & aviation and manufacturing. It uses a disciplined acquisition strategy to identify profitable companies that operate in niche markets and generate steady cash flows.

In the last two decades, EIF stock has returned a staggering 2,630% to shareholders after accounting for dividends, while the TSX index has returned “just” 385%. Despite its market-thumping gains, EIF stock pays shareholders a monthly dividend of $0.22 per share, translating to a forward yield of 5.8%. Further, these payouts have risen by 7% annually since 2004.

Despite a sluggish and uncertain macro environment, Exchange Income increased sales by 14% year over year to $602 million in the first quarter (Q1) of 2024, while adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) grew by 14% to $111 million, indicating a margin of 18.4%.

Exchange Income ended Q1 with a free cash flow of $23 million after accounting for its capital expenditures of $39 million. Comparatively, it paid shareholders dividends worth $31.17 million in Q1, which indicates a payout ratio of over 100%. A high payout ratio is not sustainable as it does not provide the company with the required financial flexibility to target acquisitions or lower balance sheet debt.

However, Exchange Income’s capital expenditure allocation suggests its growth story is far from over, and its cash flows might move higher going forward.

EIF stock is priced at less than 15 times forward earnings, which is really cheap as Bay Street expects earnings to grow by 11% annually in the next five years. Analysts remain bullish and expect the TSX dividend stock to surge by 40% in the next 12 months.

The Foolish takeaway

An investment of $20,000 in EIF stock will help you purchase 442 shares of the company. Given a monthly dividend of $0.22 per share, investors can earn $97.24 every month or $1,166.88 each year. If the company raises dividends by 7% each year, your payout should double in the next 10 years.

TFSA investors should identify and add other fundamentally strong dividend stocks to their portfolio, lowering overall risk.