How to Use Your TFSA to Create $500 per Month in Tax-Free Income

Stop worrying about your investments and start making bank with these four prime dividend stocks.

Amy Legate-Wolfe

Author Bio Amy became interested in investing in 2018 after having her first daughter. After receiving a masters degree in journalism from Western University, she became frustrated that the finance industry remained a confusing place for Canadians like her: new parents, millennials, and other young people who needed to understand their finances. Now, Amy focuses on tech companies and renewable energy for growth opportunities, coupling that with long-term investing strategies and equities. She also provides investors with a daily newsletter, Canada Stock Digest, for daily market updates. Her work can also be found at Canada's National Observer, where she writes on the business side of climate action. Before joining Motley Fool Canada, Amy wrote for major news organizations including HuffPost, CTVNews.ca, and CBC. When she’s not researching investing strategies, Amy’s time is pretty much monopolized by her two wild daughters, but in what little spare time she has she loves to do yoga, go on walks with her dog, and travel with her husband. Social Media Follow Amy on LinkedIn and Canada Stock Digest. Favorite Investment Quote “October: This is one of the particularly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” – Mark Twain

Published February 25, 2025 9:15 pm EST

If you’re looking to make your Tax-Free Savings Account (TFSA) work harder, generating a steady $500 per month in tax-free income is a realistic goal with the right strategy. The key is investing in mid-cap dividend stocks that offer both strong yields and growth potential. By carefully selecting companies with reliable payouts and solid financials, you can build a TFSA portfolio that works for you – all while keeping your income completely tax-free.

Piggy bank with word TFSA for tax-free savings accounts. — Source: Getty Images

4 stable stocks

One company that stands out for its dividend history is Exchange Income (TSX: EIF). With diverse operations spanning aviation and manufacturing, EIF has built a reputation for steady revenue generation and consistent dividend growth. The stock currently offers a yield of 5%, making it an attractive choice for those seeking passive income.

Another strong contender is Northland Power (TSX: NPI), a company focused on renewable energy. Despite reporting a slight drop in sales in its latest earnings, Northland continues to be a leader in the sector. Its dividend yield of 6.9% remains stable, supported by long-term contracts and a commitment to expansion. With global demand for renewable energy on the rise, Northland’s long-term prospects remain bright, even if short-term fluctuations occur.

Energy infrastructure company Gibson Energy (TSX: GEI) is another solid option. Known for its midstream operations, Gibson provides services critical to oil and gas transportation, ensuring a stable revenue stream. The company has consistently maintained a high dividend yield, currently at 8.1%. With its strong asset base and reliable cash flows, Gibson remains a solid choice for investors looking for predictable income without excessive volatility.

For those interested in the natural gas sector, Birchcliff Energy (TSX: BIR) offers an appealing opportunity. The company recently reported petroleum and natural gas revenue of $153.7 million for Q4, reflecting a 16% year-over-year decline. While revenue dipped, Birchcliff continues to maintain a high dividend, with a 5.5 yield%. Its robust production levels, averaging 77,623 barrels of oil equivalent per day, demonstrate strong operational efficiency. Investors seeking higher yields will appreciate Birchcliff’s ability to return capital to shareholders while navigating industry fluctuations.

Generating income

So, how much do you need to invest to generate $500 per month? The math is fairly straightforward. You’ll need to create enough income to add up to $6,000 annually. This can be a significant investment, but let’s see what would happen if you create $1,500 from each of these four stocks. Diversifying among several companies ensures a more balanced portfolio, reducing the risks associated with relying on a single stock.

COMPANY	RECENT PRICE	NUMBER OF SHARES	DIVIDEND	TOTAL PAYOUT	FREQUENCY	TOTAL INVESTMENT
EIF	$52.12	568	$2.64	$1,500	monthly	$29,604.16
NPI	$17.66	1,250	$1.20	$1,500	monthly	$22,075
GEI	$21.10	872	$1.72	$1,500	monthly	$18,399.20
BIR	$5.84	4,545	$0.33	$1,500	monthly	$26,542.80

Now as you can see, this adds up to an investment of $96,621.16. That’s just above the TFSA limit, and doesn’t provide a lot of diversification. But that’s also not taking into account annual returns! So invest less, and you could still make that $500 each month between returns and dividends.

Bottom line

Investing through a TFSA offers a major advantage: all of your dividend income and capital gains remain tax-free. This makes it an ideal vehicle for long-term wealth building. Instead of paying taxes on your investment income, you can reinvest those earnings to compound your wealth even further. Over time, this can significantly enhance the power of your portfolio.

With careful stock selection and a focus on dividend sustainability, it’s entirely possible to build a TFSA that delivers reliable tax-free income. Whether you’re supplementing your salary, covering extra expenses, or planning for retirement, a well-constructed dividend portfolio can help you achieve financial independence. One tax-free dollar at a time.