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

Passive-income seekers can consider buying shares of monthly dividend stocks and create a recurring income stream.

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Among the easiest ways to create a monthly passive-income portfolio is by investing in dividend stocks with a monthly payout. In addition to a steady stream of monthly dividends, investors should benefit from capital gains, especially if the company’s cash flows continue to expand. Moreover, if these dividend stocks are held in a TFSA (Tax-Free Savings Account), any returns in the form of dividends or capital gains are exempt from Canada Revenue Agency taxes.

Here are three monthly dividend stocks TFSA investors can buy with $20,000 right now.

Exchange Income stock

Valued at $2.1 billion by market cap, Exchange Income (TSX:EIF) pays shareholders an annual dividend of $2.64 per share, indicating a forward yield of 5.9%. Over the years, Exchange Income has targeted several accretive acquisitions to expand its earnings and cash flow, resulting in consistent dividend hikes.

Since July 2004, EIF stock has returned more than 2,600% to shareholders in dividend-adjusted gains. However, the TSX dividend stock also trades 19% below all-time highs, allowing you to buy the dip and benefit from outsized returns in the next 12 months.

Despite an uncertain macro environment, Exchange Income reported revenue of $602 million in the first quarter (Q1), up 14% year over year. It ended Q1 with a free cash flow of $23 million, and its payout ratio in the last 12 months has stood at 58%, which is sustainable.

Priced at 14.5 times forward earnings, Exchange Income stock is really cheap and trades at a discount of 40% to consensus price target estimates.

Diversified Royalty stock

Diversified Royalty (TSX:DIV) is a multi-royalty company engaged in the business of acquiring royalties from multi-location businesses and franchisors. As part of its investment strategy, Diversified Royalty purchases trademarks of companies it is going to acquire while providing its partners with operational control of their businesses.

A high-margin business allows Diversified Royalty to pay shareholders an annual dividend of $0.25 per share, indicating a forward yield of over 9%.

Analysts remain bullish on Diversified Royalty stock and expect shares to surge by more than 40% in the next 12 months. After accounting for its high dividend yield of 9.2%, total returns will be closer to 50%.

Whitecap Resources stock

The final monthly dividend stock on my list is Whitecap Resources (TSX:WCP), a company operating in the energy sector. In the last 15 years, Whitecap has aggregated a significant light oil resource base and enjoys stable production levels.

Whitecap’s growth story is far from over, given it invested close to $400 million in capital expenditures in Q1 of 2024. The company expects to end 2024 with a free funds flow of $700 million, while its dividend payout will total less than $450 million this year. So, it has enough room to lower balance sheet debt amid volatile crude oil prices.

Whitecap increased dividends by 24% year over year in Q1 of 2024 and its dividends have more than tripled in the last three years.

The Foolish takeaway

COMPANYRECENT PRICENUMBER OF SHARESDIVIDENDTOTAL PAYOUTFREQUENCY
Exchange Income$44.97148$0.22$32.56Monthly
Diversified Royalty$2.722,451$0.021$51.47Monthly
Whitecap Resources$10.15657$0.061$40Monthly

Investors can allocate a total of $20,000 equally in the three stocks discussed above. The investment should help them earn $1,488 in annual dividends, indicating an average forward yield of 7.4%. If the dividends are raised by 7% annually, your payout will double in the next 10 years.

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 no position in any of the stocks mentioned. The Motley Fool recommends Whitecap Resources. The Motley Fool has a disclosure policy.

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