How I Use TFSAs to Earn $371 per Month in Tax-Free Income

Are you just getting started investing, hoping to earn tax-free passive income in your TFSA?

If so, you’ve got a pretty common goal, which means that you face competition. In a market where everybody hates stocks and is hoarding cash, yield is easy to come by, as stock valuations are low and dividends are relatively high. In today’s market, where stocks are all the rage, yield is much harder to find.

Nevertheless, it can be obtained. I personally earn about $371 per month in tax-free passive income, across RRSPs and TFSAs. I could be earning much more than that, if I had a dividend-biased portfolio. In this article, I will explore how I use my RRSP and TFSAs to earn $371 per month in tax-free income – and how you can do the same or even better.

How much passive income I’m earning

I currently have three tax sheltered/tax deferred accounts that I hold investments in. The amounts they are expected to pay out in dividends in the next 12 months are as follows:

• RRSP: $2,869.79.
• TFSA 1: $1,098.77.
• TFSA 2: $483.6.
• TOTAL: $4,456.16.

The monthly averages for these accounts are:

• RRSP: $239.15.
• TFSA 1: $91.56.
• TFSA 2: $40.3.
• TOTAL: $371.

There are a few things to note here.

One, my projected 12-month dividend income is actually down from the peak, which was about $5,500 at the start of this year. The reason it has declined is because I let some GICs mature and sold some stocks, re-investing the proceeds into lower-yielding stocks, while keeping some in cash.

Two, these monthly amounts can fluctuate. Companies hike and cut dividends pretty frequently; you never really know what you’ll make in dividends in a year, until that year is over. With that out of the way, we can explore how I earn dividend income from my stock portfolio.

How I earn dividend income

The main source of dividend income in my portfolio is dividend stocks, followed closely by ETFs. Some individual stocks in my portfolio, such as The Toronto-Dominion Bank (TSX: TD) and Suncor Energy (TSX: SU) have high yields, but most don’t. The ETFs I own generally have yields close to 2.5%, and they contribute significantly to my portfolio dividends. I own some stocks that pay no dividends at all, such as Berkshire Hathaway.

TD Bank is one of the biggest contributors to my portfolio income. The stock doesn’t exactly have a blisteringly high yield today (3.6%), as it has increased dramatically in price this year. However, it yielded over 6% when I bought it cheaply last year. I bought 108 TD shares at about $78 on average last year, and I bought another lot of 60 at $82 this year. Today, the shares are worth $19,824 and pay me $705.60 per year in dividends. TD Bank has a good dividend growth track record, and I expect my TD dividends to increase over time.

Near the beginning of this article, I wrote that I could be earning much more than the $371 per month I’m actually getting in dividends and interest. The reason for that is, I have plenty of money in no/low yield stocks and some cash holdings. If I had all of my RRSP and TFSA money ($184,068 combined) in high-yielding stocks like TD, I’d be getting closer to $544 per month. Here is some math on that, going on the assumption that my entire $184,068 portfolio was invested in TD Bank stock.

As you can see, I could easily be earning over $500 per month in passive income. The reason I don’t is that I have a diversified portfolio and see a lot of potential in some non-dividend stocks, such as Berkshire Hathaway. A huge dividend preference is not always rational, but then again, watching dividends come in is always a good time. To each his/her own.