TFSA 101: Earn $402 Per Month Tax-Free

Hold diversified investments such as GICs, ETFs, and dividend stocks in a TFSA to earn more than $400 per month in tax-free income.

| More on:
Piggy bank with word TFSA for tax-free savings accounts.

Source: Getty Images

The Tax-Free Savings Account (TFSA) was introduced in 2009 to encourage savings among Canadian residents. Any returns generated in this registered account are exempt from taxes, making it popular in the past decade. Moreover, you can hold assets such as stocks, bonds, Guaranteed Investment Certificates (GICs), and mutual funds in the TFSA.

The TFSA contribution room in 2024 has risen to $7,000, raising the total cumulative contribution room to $95,000. Let’s see how you should allocate this amount across asset classes to benefit from diversification and lower risk.

Invest 30% in GICs

Younger investors should consider allocating around 30% of their TFSA contributions toward fixed-income products such as GICs. Here, you deposit money with a bank or financial institution and earn interest on these deposits.

Interest rate hikes since 2022 have meant that several banks now offer a 5% interest rate on GIC deposits, which is higher than the current inflation rate. GICs are ideal for investors with a low-risk appetite and a short-term investment horizon.

So, 30% of $95,000 is $28,500. Investing in GICs can earn you $1,425 in annual interest payments, given a 5% yield.

Invest 50% in dividend ETFs

A majority of your income should be allocated towards equities, especially if your investment horizon is more than 10 years. The best way to invest in stocks is by holding dividend ETFs, or exchange-traded funds, such as iShares Core MSCI Canadian Quality Dividend Index (TSX:XDIV), which offers you a tasty dividend yield of over 4%.

Some of the ETF’s top holdings include blue-chip giants such as Manulife, Royal Bank of Canada, Suncor Energy, Enbridge, and Toronto-Dominion Bank.

The XDIV pays shareholders a monthly dividend. In the last 12 months, it paid shareholders $1.30 per share in cumulative dividends, indicating a trailing yield of 4.85%. An investment of $47,500 in the ETF would help you buy 1,774 shares of the fund and earn $2,340 in annual dividends.

COMPANYRECENT PRICENUMBER OF SHARESDIVIDEND/INTERESTTOTAL PAYOUTFREQUENCY
GICsNANA$1,425$1,425Annual
XDIV ETF$26.771,774$0.11$195Monthly
Brookfield Infrastructure$39.80477$0.555$265Quarterly

Invest 20% in dividend stocks

Investors can also consider owning shares of undervalued dividend stocks such as Brookfield Infrastructure Partners (TSX:BIP.UN). Today, BIP stock offers you a dividend yield of 5.6% and trades at a steep discount of 21% to consensus price target estimates.

Brookfield Infrastructure operates a portfolio of cash-generating real assets across sectors such as utilities, transport, midstream, and data infrastructure. Around 90% of its earnings are derived from fee-based contracts or rate-regulated structures. Further, 70% of its cash flow is protected from volume or price exposure, and 85% of cash flow is indexed to inflation.

Brookfield aims to distribute between 60% and 70% of its cash flow via dividends. Moreover, in the last decade, its dividend payouts have risen by more than 5% annually.

Armed with a strong balance sheet and an investment-grade credit rating, BIP is among the best dividend stocks to buy in July 2024. An investment of $19,000 in BIP stock will help you purchase 477 shares of the company and earn close to $1,060 in dividends in the next 12 months.

Investing in these three products can help investors earn $4,825 in dividends in the next year, indicating a monthly payout of $402.

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 Aditya Raghunath has positions in Enbridge. The Motley Fool recommends Brookfield Infrastructure Partners and Enbridge. The Motley Fool has a disclosure policy.

More on Dividend Stocks

edit Safe pig, protect money
Dividend Stocks

3 Blue-Chip Stocks So Safe That Canadians Can Hold Them Until They Die

These blue-chip stocks can be good buy-and-forget investments to hold for decades in your self-directed investment portfolio.

Read more »

edit Person using calculator next to charts and graphs
Dividend Stocks

Invest $7,000 in This Dividend Stock for $1,810 in Passive Income

Investing in cheap TSX dividend stocks such as Enghouse can help you derive outsized gains over time.

Read more »

Redwood trees stretch up to the sunlight.
Dividend Stocks

Got $5,000? These Are 2 of the Best Growth Stocks to Buy Right Now

A $5,000 investment is enough to earn substantial profits from two high-growth stocks in 2024.

Read more »

Dial moving from 4G to 5G
Dividend Stocks

1 Stock to Steer Clear of

BCE stock (TSX:BCE) has been under immense pressure this year, and it doesn't look like it's going to improve any…

Read more »

growing plant shoots on stacked coins
Stocks for Beginners

Beginners: 4 TSX Stocks I’d Buy Right Away!

Beginner investors should explore these stocks, which offer nice dividend income and good long-term returns potential.

Read more »

Electricity pylons against a sunset
Dividend Stocks

Is Fortis (TSX:FTS) Stock a Buy in the New Bullish Market?

This Canadian Dividend Aristocrat might be the perfect choice if you’re looking to shore up your holdings to benefit from…

Read more »

edit Businessman using calculator next to laptop
Dividend Stocks

3 No-Brainer Stocks to Buy Under $30

Three TSX stocks under $30 are profitable options for price-conscious investors.

Read more »

edit Safety First illustration
Dividend Stocks

3 Defence Stocks to Consider for July

Here are the top three US stocks to consider if you want to invest in the defence sector and an…

Read more »