Have you ever wanted to earn significant sums of passive income each month tax-free?
It might sound like a “too good to be true” proposition, but modest sums of monthly tax-free income can be earned. If you hold your investments in a Tax-Free Savings Account (TFSA), you can also enjoy tax-free status on those investments.
How much tax-free passive income can you earn? Well, if you were 18 or older in 2009, you have accumulated $95,000 worth of TFSA contribution room. If you haven’t made any deposits yet, you can immediately deposit $95,000 into a TFSA, invest it in TSX index funds, and get to $2,850 per year, which works out to $237.50 per month (though you actually get the income quarterly). That’s a decent amount of passive income right there. However, if you’re willing to invest a little more aggressively, you can get more than that on a literal monthly schedule.
In this article, I will explore one stock that could be part of a portfolio of monthly paying dividend stocks paying you $299 per month in your TFSA.
First National
First National Financial (TSX: FN) is a monthly pay TSX financial stock that pays out $0.2041 in dividends per quarter, or $2.45 per year. At today’s stock price of $36.05, you get a 6.8% yield. Invest $52,764 at a 6.8% yield, and you get $299 per month in passive income. Since $52,941 is well below the typical middle-aged Canadian’s TFSA contribution room, you can probably tax shelter 100% of $52,941.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY |
| First National | $36.05 | 1,463 | $0.204167/month ($2.45/year). | $299/month ($3,584/year) | Monthly |
Of course, you should never invest 100% of your portfolio in just one stock. The Motley Fool recommends 25 minimum. I’m using First National here just to illustrate what’s possible with high-yield monthly paying dividend stocks. They can produce quite a bit of passive income — and you can shelter much of it in a TFSA.
The case for First National
All of the above being said, FN is a worthy addition to a TFSA dividend stock portfolio. The company scores well on the profitability factor, with an 83% gross margin, a 35% net income margin, and a 42% return on equity (ROE). It has done a lot of compounding over the last five years, with revenue up 11.2% and earnings up 11.7% per year. Finally, it’s cheap, trading at eight times earnings, 3.16 times book and 11.9 times cash flow. Is FN such a miraculous stock that you can just invest your entire TFSA into it? No. There are real risks, such as the possibility of more Bank of Canada interest rate cuts. But the stock is appealing enough to be a part of a diversified portfolio.
Foolish takeaway
If you have enough TFSA contribution room, it’s definitely possible to get $299 per month in dividends. I wouldn’t call such an outcome “likely” or the strategies that might lead to it “safe,” but with a higher-than-average risk tolerance, you might just make it work. Of course, you shouldn’t go investing all of your money into First National Financial stock, but a sizable portfolio weighting might make sense.
