The Tax-Free Savings Account (TFSA) allows Canadians to make money from their investments tax free. This can be very powerful and can snowball your wealth bigger and bigger down the mountain when you consistently make money from your investments.
The only way to earn a tax-free TFSA paycheque every month is to buy and hold investments that pay out cash distributions, interests, or dividends monthly.
Here are some examples of Canadian monthly dividend stocks that could provide monthly income and some appreciation down the road.
Canadian REITs
Many investors love earning passive income from real estate. If you want even more passive income from real estate, you can consider investing in Canadian real estate investment trusts (REITs).
Just know that REITs trade like stocks, so their stock prices go up and down. They’re also interest rate sensitive. In other words, generally speaking, when interest rates rise, Canadian REIT stock prices fall and vice versa.
Particularly, you can explore Canadian REITs that earn rental income from their portfolio of real estate.
For example, Killam Apartment REIT (TSX: KMP.UN) is a defensive residential REIT. It just reported resilient second-quarter results on August 7. Property revenue climbed 4.5% year over year to $90.8 million. Net operating income (NOI) rose 6.6% to $59.9 million. Funds from operations (FFO) rose 1.3% but was flat at $0.30 on a per-unit basis. Same-property apartment occupancy was also flat (but high) at 98.2%. As well, its same-property NOI growth was 8.5%.
The consensus analyst price target represents near-term upside potential of approximately 18% from the $19-per-unit stock. At this quotation, it offers a cash distribution yield of almost 3.7%, which is above average in the industry.
Notably, Canadian REITs pay out cash distributions that are like dividends but are taxed differently, depending on the source of distribution. Their cash distributions can be a return of capital, other income, capital gains, and foreign income. Essentially, you don’t have to worry about paying taxes on your REIT cash distributions unless they’re foreign income, which could have foreign withholding taxes that are non-recoverable in the TFSA.
A Canadian monthly dividend stock
Exchange Income (TSX: EIF) is an interesting monthly dividend stock. It looks for acquisitions in the aerospace and aviation and manufacturing industries. From its 19 subsidiaries that provide essential products and services to niche markets, it generates diversified streams of cash flow, providing reliable monthly income to its shareholders.
Since 2004, EIF has paid a stable or growing dividend. Its 10-year dividend-growth rate is 4.2%, which is not spectacular. However, it offers a decently high current dividend yield of 5.4% at $48.85 per share.
Importantly, the stock appears to be undervalued. At the recent quotation, the consensus analyst price target represents near-term upside potential of 30%. In other words, the stock trades at a good discount of roughly 23%.
Food for thought on earning monthly dividends
Monthly dividend stocks are rare. Most Canadian dividend stocks pay out dividends quarterly. What’s important is to focus on stocks that pay out safe and ideally growing dividends.
The dividend yield is also important because it tells you how much you would be earning in dividends annually if you buy the stock today. Oh, and of course, try to buy stocks at or below their intrinsic values to protect your capital.
