It finally looks like it’s time to start investing once again, and perhaps more aggressively than the last few years. This comes as the Bank of Canada lowered the key interest rate to 4.75% this month. This could signal a shift in the markets with more confidence leading to more growth from investments.
And that’s where the Tax-Free Savings Account (TFSA) comes in. The TFSA is the perfect option for Canadians looking to create passive income. And a lot of it. So if it were me, here is how I would try and create $600 in monthly passive income.
Why the TFSA
First, let’s go over why the TFSA in the first place. Investments within a TFSA grow tax-free. This means any interest, dividends, or capital gains earned in the account are not subject to income tax, allowing the investments to compound more efficiently. Furthermore, withdrawals are also not taxed.
What’s more, within a TFSA, you can hold a variety of investments including stocks, bonds, mutual funds, exchange-traded funds (ETF), guaranteed investment certificates (GIC), and more. This allows for tailored investment strategies aimed at generating passive income.
And it doesn’t matter if you’re a young investor, or a retiree, the TFSA is perfect for you. Young Canadians can start contributing early, maximizing long-term tax-free growth potential. Older Canadians can use TFSAs to manage retirement income efficiently, avoiding the clawback on benefits like the Guaranteed Income Supplement (GIS).
Defining passive income
Now before you dive in with a dividend stock or another fixed income method, it’s important to remember that passive income comes from multiple places. Certainly, you can attain passive income through dividend income. However, it comes from returns as well.
That’s why it’s important to consider all the factors when making an investment. If you want a monthly income from your investment, you’re going to want growth that will continue at a stable clip month after month. And a dividend that’s not about to be cut any time soon.
With that in mind, let’s look at one strong option investors may want to consider.
A&W stock
I know, this might seem like the strangest place to park your cash. However, A&W Revenue Royalties Income Fund (TSX:AW.UN) is actually perhaps one of the best options for those wanting monthly dividend income, as well as rising returns.
Not that this has happened in the recent past. Shares fell as consumers cut back, but the price recently rose significantly as bank cuts came in. More cash on hand will mean more consumers back at locations. And this will lead to higher royalties for the company.
Meanwhile, A&W stock offers a 6.6% dividend yield, with shares up 114% since coming on the market in 2005. So here is how you could create that $600 per month in passive income, or $7,200 per year. While also taking into account a share price increase of 4%, which would be its compound annual growth rate (CAGR) since coming on the market.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY | PORTFOLIO TOTAL |
| AW.UN – now | $30 | 2,500 | $1.92 | $4,800 | monthly | $75,000 |
| AW.UN – 4% | $31.20 | 2,500 | $1.92 | $4,800 | monthly | $78,000 |
So now you’ll have $3,000 in returns and $4,800 in annual dividend income in just a year! That would come to $7,800 in passive income for the year, or $650 each and every month.
