Since the introduction of the Tax-Free Savings Account (TFSA) in Canada in 2009, it has become a vital tool for Canadians aiming to build wealth and generate tax-free passive income. With its tax advantages and flexibility, a TFSA is an ideal vehicle for investors seeking consistent income without tax implications — especially those wanting a monthly increase in their income.
Today, let’s explore how you can use a TFSA to achieve $250 in monthly passive income with one stock that could get you there.
The TFSA benefits
The TFSA offers several compelling benefits for those seeking passive income. All income earned within the account, including interest, dividends, and capital gains, is tax-free. Additionally, withdrawals from a TFSA do not affect eligibility for government benefits or tax credits. This makes it an excellent choice for both short-term savings and long-term investment goals. With the contribution limit increasing to $7,000 in 2024 and a total contribution room of $95,000 for those who have maximized contributions since 2009, the TFSA provides substantial capacity for growth.
To generate $250 per month, an investor needs to achieve an annual passive income of $3,000. Assuming an average yield of 5% on investments, this translates to a required investment of approximately $60,000. By leveraging the TFSA’s tax-free growth and withdrawal benefits, investors can maximize their returns and keep all earned income without tax deductions.
But there could be an even faster way to achieve this. Let’s examine one dividend stock that might be worth a look.
Capstone Infrastructure
Capstone Infrastructure (TSX:CSE.PRA) is a strong candidate for TFSA investments, particularly if your goal is to generate passive income. The company offers an attractive dividend yield of 6.68%, meaning you would earn $6.68 for every $100 invested annually. With this yield, investing approximately $45,000 in Capstone Infrastructure could help achieve the $3,000 annual income target, translating to $250 per month from dividends alone.
Capstone’s current yield is higher than many other dividend-paying investments, making it a potentially lucrative source of passive income within a TFSA. Plus, the company’s investments in renewable energy sources like wind, hydro, and solar align with the growing emphasis on sustainability and could appeal to socially-conscious investors.
However, it doesn’t come without risks. The company currently has a trailing price-to-earnings (P/E) ratio of 185.2. So, Capstone’s stock is significantly more expensive compared to the industry average. This suggests that the stock may be overvalued. What’s more, the company has experienced volatile earnings growth, which could impact future dividend payments and overall investment stability. Finally, it operates with weak financial ratios, such as a high price-to-book ratio and a substantial debt-to-equity ratio, which indicate potential risks to the company’s financial stability.
Bottom line
Before investing, consider your investment goals and risk tolerance. Capstone Infrastructure may suit those willing to accept higher risk for the potential of higher rewards. Also, keep in mind your investment timeframe. If you plan to invest for the long term, you might be more comfortable with the volatility associated with Capstone. However, if you need liquidity in the short term, other investments with more stable returns might be more appropriate.
Using a TFSA to generate $250 in monthly passive income is an achievable goal with careful planning and strategic investment choices. Capstone Infrastructure offers a high dividend yield, but comes with its set of risks. Balancing these factors and aligning them with your investment goals will help you effectively leverage your TFSA for consistent, tax-free passive income. As always, consider consulting with a financial advisor to tailor your investment strategy to your individual needs and objectives.
