How to Earn a TFSA Paycheck Every Month and Pay No Tax on it

Here’s how you can use a TFSA to earn a few hundred buck a month in tax-free passive income.

Tony Dong, MSc, CETF®

Tony turned a series of 2017 marijuana stock losses into a freelance career advocating for ETF investing. He currently holds a Master’s in Risk Management from Columbia University and is a Certified ETF Advisor (CETF®). Tony is the founder of ETF Portfolio Blueprint (etfportfolioblueprint.com) and the Lead ETF Analyst for ETF Central, a partnership between Trackinsight and the NYSE. His analysis has also been featured in publications like Kiplinger, 24/7 Wall St., U.S. News & World Report, TheStreet, and Benzinga. Tony also provides independent content and marketing consulting services to various Canadian and U.S. ETF issuers. His editorial opinions for The Motley Fool remain independent and objective.

Published September 28, 2024 9:30 am EDT

Forget the bi-weekly paycheck—real freedom comes from earning monthly, tax-free passive income generated by a diverse collection of profitable enterprises that consistently distribute dividends. This way, you earn money while you sleep.

You can achieve this level of financial independence with the right exchange-traded fund (ETF), a Tax-Free Savings Account (TFSA), and a starting capital of at least $50,000. Here’s how to set it up step by step and a calculation of how much you could be making.

Picking the right ETF

When I’m scouting for the ideal ETF to stock up in a TFSA for some steady passive income, I zero in on three must-haves:

Low expense ratios: to keep more of what you earn.
A high yield: ideally, something north of 4%.
Solid diversification: to spread risk and enhance stability.

The ETF that ticks all these boxes for me is iShares Core MSCI Canadian Quality Dividend Index ETF (TSX:XDIV). It pays monthly, translating to an annualized distribution yield of 4.42% as of September 11.

This fund isn’t just chasing high yields or dividend growth; it’s also about quality. It targets companies with robust balance sheets and stable earnings.

The portfolio comprises 19 of Canada’s most reliable blue-chip dividend payers, featuring stalwarts that you might already be familiar with.

The majority of XDIV’s holdings are rooted in the sectors well-known for their dividend-paying capabilities: financials, energy, and utilities.

Historically, with dividends reinvested, XDIV has delivered an annualized return of 9.74% since its inception in June 2017. Even if you opted to withdraw the dividends, you’d have still seen a respectable annualized return of 4.98%.

How much passive income could you generate?

A $50,000 TFSA invested in XDIV would buy you 1,739 whole shares based on its September 11th price of $28.75. XDIV last paid out a monthly dividend of $0.106 per share on August 30. Assuming that remains consistent moving forward, your $50,000 worth of XDIV in a TFSA could generate around $184.33 per month in tax-free passive income.