The Tax-Free Savings Account (TFSA) is probably the best way to create passive income. This top-notch income vehicle allows you to contribute more and more each year, creating passive income that cannot be taxed. And because of this, it’s also the best way to aim for monthly passive income.
That’s why today, we’re looking at a monthly income stock that could provide that $300 monthly. What’s more, it looks like those payments could increase again and again. So, let’s dig into Exchange Income (TSX:EIF).
Making that cash
Let’s not beat around the bush. First, we’re going to look at how to create $300 per month from EIF. At writing, the dividend stock trades at about $71.50 per share, with a dividend of $2.64 annually. That comes to a 3.7% dividend yield. The goal here is to create $3,600 each year for that $300 each and every month.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY | TOTAL INVESTMENT |
|---|---|---|---|---|---|---|
| EIF | $71.79 | 1364 | $2.64 | $3,600 | Monthly | $97,976 |
As of this moment, it would take about $98,000 to create $300 per month, or $3,600 per year, as you can see above. And that’s a huge investment. However, it’s important to note that you’re not just getting dividends, but returns. So, is this dividend stock worth the investment beyond just dividends alone?
Growth with income
So, let’s look at whether or not the growth and free cash flow (FCF) coverage can gain you enough income to create that $300 per month. First, the dividend. EIF’s dividend recently rose 8% year over year, with the dividend stock providing a long history of regular increases. If it continues to grow that dividend at even 5% annually, investor income could double in about 14 years without adding another penny.
Furthermore, management stressed that the payout ratio based on FCF means less maintenance on capital expenditure (capex). That ratio currently sits at 63%, which is actually quite healthy and leaves room for more growth in dividends, as well as the overall business. And earnings brought more momentum, with a record quarter seeing adjusted earnings before interest, taxes, depreciation, and amortization guidance raised to between $725 and $765 million.
Considerations
There are good and bad items that need to be considered here. On the bright side, there could be more growth on the way. For instance, EIF’s Canadian North added a 10-year contract with Nunavut. Plus, manufacturing orders are rebounding after tariff issues. All this can mean even more dividend growth.
Yet on the other side, there remains a high earnings per share payout near 100%, which is bad for optics since the dividend depends on FCF. Furthermore, its debt-to-equity ratio is at 170%. Again, cash flow supports this, but rising debt or higher financing costs could strain it. Plus, with an acquisition underway, should manufacturing demand or trade policies shake, this could swing revenue and, in turn, share prices.
Bottom line
Altogether, EIF stock isn’t going to make you $300 per month the easy way. The dividend is high, sure. But it’s going to take tens of thousands of dollars, if not $100,000, to get you passive income immediately. However, play it slow and steady and drip feed into this dividend stock, and money could compound in your TFSA, thereby giving you meaningful and steady dividend growth over time.
