How I’d Invest $7,000 in My TFSA to Earn $50 in Monthly Income

High-yield stocks like Freehold Royalties, which is yielding more than 9%, are prime candidates for your TFSA.

The tax-free savings account, or TFSA, is an opportunity for Canadian investors to earn tax-free income and capital gains. As we know, the cumulative limit for the TFSA currently stands at $102,000. This means that the tax savings from this investment vehicle can be substantial.

Let’s take a look at two high-yield stocks to consider in order to generate $50-plus in monthly, tax-free income.

Blocks conceptualizing Canada's Tax Free Savings Account

Source: Getty Images

Freehold Royalties: A juicy tax-free yield of 9.5%

As a royalty company, Freehold Royalties Ltd. (TSX: FRU) offers investors many advantages. These advantages include lower risk, high returns, and predictability. As you can see from Freehold stock’s price graph below, these advantages have translated into a relatively steady performance (excluding the pandemic years, of course).

Today, Freehold Royalties stock is yielding a very generous 9.6%. While this high yield might cause concern over Freehold’s dividend, in my view, we can rest assured. This is because the dividend is backed by a low-risk, diversified revenue base, and a business model that doesn’t include any exploration risk or capital expenses. This is the beauty of Freehold’s royalty business.

But let’s dig deeper into the dividend. At a 9.6% yield, a natural question would be whether this dividend is sustainable. In 2024, Freehold generated $231 million, or $1.53 per share, in funds from operations. This compares to dividends paid of $163 million, or $1.08 per share. With little to no capital requirements of the business, we can see that the dividend is well covered.

Looking ahead, the company’s diversified asset base of 360 companies across the US and Canada will continue to provide it with royalties. Last year, Freehold’s proven, developed reserves increased 107% and its proven and probable reserves increased 109%. While the price of oil has weakened this year, I think we can find comfort in the fact that Freehold continues to benefit from the strong operational performance of its royalty holdings.

Peyto: Yielding 7.3%

Peyto Exploration and Development Corp. (TSX: PEY) is another stock I’d invest in for tax-free dividend income within my TFSA. Like Freehold Royalties, Peyto operates in the oil and gas industry. Peyto is, in fact, one of Canada’s lowest-cost natural gas producers. Given this, along with the positive outlook for natural gas, Peyto is a good place to invest.

With a current dividend yield of 7.3%, Peyto stock is an interesting candidate for our TFSAs. This yield is backed by strong cash flows, as well as a five-year compound annual growth rate (CAGR) of its dividend of more than 60%. Also, natural gas continues to have a strong outlook, as Canada’s liquified natural gas (LNG) industry continues to ramp up.

How to earn $50/month – tax-free

So let’s talk specifics. In order to generate $50 per month by investing in these two stocks, take a look at the following table.

Essentially, buying 300 shares of Peyto and 200 shares of Freehold Royalties will generate $51 of monthly income for your TFSA. This equates to $612 every year of tax-free income.

The bottom line

Investing in high-yield stocks is not without risk, but the two stocks discussed in this article have very attractive risk/reward trade-offs. Simply put, these oil and gas stocks are dependent on commodity prices, of which they have little control.

However, in Peyto’s case, it is a low-cost producer and natural gas has a positive long-term outlook. This mitigates its risks. In Freehold’s case, this company is a royalty trust with highly diversified royalty exposure, and this mitigates its risks.

In summary, investing approximately $7,000 in these two dividend stocks within your tax-free savings account can provide pretty reliable, tax-free monthly income of $50.

Fool contributor Karen Thomas has positions in Freehold Royalties and Peyto Exploration and Development. The Motley Fool recommends Freehold Royalties. The Motley Fool has a disclosure policy.

More on Dividend Stocks

Group of people in a line at an ATM waiting to make a cash withdrawal
Dividend Stocks

The TFSA Withdrawal Rule Every Canadian Should Know

The account is a much better place to invest long term than to make frequent trades and withdrawals.

Read more »

man shops at grocery store
Dividend Stocks

The Best Canadian Stocks for Conservative Investors Right Now

These two Canadian stocks combine durable businesses, growing earnings, and shareholder returns.

Read more »

Three children jump on an outdoor trampoline
Dividend Stocks

2 Solid Dividend Stocks Down 20 Percent to Buy Before They Bounce Back

These Canadian companies have been increasing their dividends year after year, while their stocks have pulled back from recent highs.

Read more »

happy woman throws cash
Dividend Stocks

The Ideal TFSA Stock: A 5.9% Yield-Paying Constant Cash

Enbridge’s predictable cash flows, substantial growth pipeline, and long history of dividend increases underpin its long-term investment appeal for TFSA…

Read more »

woman gazes forward out window to future
Dividend Stocks

Dividend Income in Retirement: What Could Go Wrong?

Dividend investing is a proven way to create income in retirement but you must know the risks you need to…

Read more »

The TFSA is a powerful savings vehicle for Canadians who are saving for retirement.
Dividend Stocks

A 5% Monthly Payer I’d Buy for My TFSA: About $100 a Month on $24,000

Canada’s largest residential landlord offers a high yield, reliable monthly income, and a tax-sheltered foundation for TFSA investors.

Read more »

Two seniors walk in the forest
Dividend Stocks

Can Dividends Replace a Paycheque in Retirement?

Can dividends in retirement replace your paycheque? Explore how Scotiabank, RioCan REIT, and Fortis can help build a steady retirement…

Read more »

Sliced pumpkin pie
Dividend Stocks

The Fees That Quietly Eat Into a Small Investment

Many funds charge outrageous fees, but broad market index funds like the iShares S&P/TSX Capped Composite Index ETF (TSX:XIC) usually…

Read more »