TFSA 101: Earn $250 Per Month Tax-Free

Canadian investors should consider buying and holding quality dividend stocks in a TFSA (Tax-Free Savings Account) to begin a recurring income stream at a low cost. Any income earned in the registered account is exempt from taxes, making dividend stocks an ideal investment as you can benefit from long-term capital gains and regular dividend income.

The cumulative TFSA contribution limit has increased to $95,000 in 2024. So, let’s see how much you need to invest to earn $250 per month tax-free by investing in these three dividend stocks.

Exchange Income stock

Valued at $2.3 billion by market cap, Exchange Income (TSX:EIF) offers you a tasty dividend yield of 5.4%, given its monthly dividend of $0.22 per share. In the last 10 years, Exchange Income stock has returned 368% to shareholders after adjusting for dividend reinvestments. Moreover, the TSX dividend stock trades 11% below all-time highs, allowing you to buy the dip.

Exchange Income operates in the aerospace manufacturing segment and reported revenue of $661 million in the second quarter (Q2) of 2024, up 5% year over year. Its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) stood at $157 million, up 7%, while free cash flow rose from $98 million to $101 million in the last 12 months.

Exchange Income’s payout ratio in the last 12 months has stood at 61%, which is not too high and provides the company with flexibility to target acquisitions and strengthen the balance sheet.

Priced at 12.5 times forward earnings, EIF stock is relatively cheap and trades at a 30% discount to consensus price target estimates.

Alaris Equity Partners stock

Alaris Equity Partners (TSX:AD.UN) is a small-cap stock offering a dividend yield of 8.2%. The company invests in private companies to meet the latter’s business and capital objectives, which include management buyouts, dividend recapitalization, growth, and acquisitions.

Basically, it provides alternative financing to profitable companies in exchange for distributions with the aim of generating stable cash flows, which are then paid to shareholders via dividends.

In the last six months, its net distributable cash flow rose 14% year over year to $55.2 million or $1.21 per share, indicating a payout ratio of 56%.

Decisive Dividend stock

The final dividend stock on the list is Decisive Dividend (TSXV:DE), which offers you a forward yield of 8.3%. Decisive Dividend uses a disciplined acquisition strategy to identify profitable, high-quality manufacturing companies with a sustainable competitive advantage and a focus on non-discretionary products.

While Decisive Dividend reported record operating performance in 2023, demand for its products manufactured by certain subsidiaries has declined amid a challenging macro environment.

In the last six months, Decisive Dividend’s sales and gross profits have fallen by 6% while its adjusted EBITDA narrowed by 27% year over year.

Its tepid performance has dragged shares lower by 18% in 2024. However, the stock trades at a 20% discount to consensus price target estimates.

The Foolish takeaway

An investment of $42,000 distributed equally in the three stocks should help investors more than $3,000 per year in dividend income, translating to a monthly payout of over $250.