TFSA Passive Income: Earn $500/Month

Dividend stocks like First National Financial (TSX:FN) can easily produce $500/year in passive income.

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Do you want to earn $500 in passive income each and every month? With stocks, index funds, and Guaranteed Investment Certificates (GICs), it’s possible to have enough portfolio diversification that you receive a bit of dividend income monthly. Arguably, having monthly payouts is not the most important thing. It’s your cumulative result that really matters. Nevertheless, if you hate waiting an entire quarter for dividend income to come in, you can arrange to receive it more frequently.

In this article, I will explore a method that can get you up to $500 per month in passive TFSA income with not a whole lot invested.

Option #1: The low-risk index fund method

Index funds are classic TFSA investments. They offer a lot of diversification, and they usually pay dividends. When you hold a typical index fund, you get dividends paid out each and every quarter. It’s not quite a monthly pay schedule, but if you buy enough different funds, you may be able to get a cheque each and every month.

What kinds of funds should you hold?

iShares S&P/TSX 60 Index Fund (TSX:XIU) would be a place to start. It’s a Canadian index fund based on the TSX 60, an index comprising the 60 biggest publicly traded companies by market cap. XIU’s fee is a mere 0.12%. Its dividend yield is 3.11% — higher than the yield on the TSX Composite Index. Finally, it is the most traded index fund in Canada, which gives it a very tight bid-ask spread (another type of trading cost that you have to think about).

$500 per month is $6,000 per year. To get that much income at a 3.11% yield, you need to invest about $192,000. It’s not a trivial amount of money, but you could get there in time.

Option #2: The riskier but potentially faster individual stocks method

If having to save $192,000 to get to $500 in monthly dividend income seems like too much for you, there are faster ways of getting there — chiefly, by investing in individual dividend stocks with high yields that pay monthly.

Consider First National Financial (TSX:FN). It’s a Canadian non-bank lender that pays a $0.201467 monthly dividend. That works out to $2.45 per year. At today’s stock price of $35.89, $2.45 in annual dividends is a 6.83% dividend yield.

First National is a pretty good company. It trades at nine times earnings and has compounded its earnings at 12% per year over the last five years. The combination of growth and valuation here is very enticing, and FN is actually growing more rapidly than the five-year average this year.

With a 6.83% yield, you would need to invest $87,847.77 to get $500 in monthly passive income. Here’s the math on that.

COMPANYRECENT PRICENUMBER OF SHARESDIVIDENDTOTAL PAYOUTFREQUENCY
First National$35.892,449$0.201467/quarter ($2.45/year)$500/month ($6,000/year)Monthly
First National: passive income math.

Option #3: Guaranteed Investment Certificates

A final way to get $500 in monthly passive income is with GICs. GICs yield about 5%, so if you invest $10,000 in a one-year GIC each month for 12 months, you will start collecting $10,000 plus $500 in interest at the end of that method. The total amount invested is $120,000. It’s not as easy or straightforward as the stock/fund strategies outlined above, but it is the least risky of the bunch.

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 Andrew Button has positions in iShares S&p/tsx 60 Index ETF. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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