If your goal is to generate passive income inside a Tax-Free Savings Account (TFSA), the easiest place to start is by working backwards from a specific monthly target. In this case, $100 per month. That might not sound life changing, but for many investors it is a realistic first milestone and a good proof of concept.
The challenge is that most dividend stocks pay quarterly, not monthly. Others have variable payouts that make planning difficult. One way around this is to use a fund with a managed distribution policy, where the payout is designed to be consistent.
A longstanding example on the TSX is the Canoe EIT Income Fund (TSX:EIT.UN). Holding a fund like this inside a TFSA keeps the math simple and the income tax free.
Working Backwards From the Monthly Payout
The defining feature of EIT.UN is its fixed monthly distribution. Each share pays $0.10 per month, regardless of market conditions. The fund typically goes ex distribution around the third week of the month, with cash paid around the middle of the following month.
That fixed payout is what makes income planning straightforward. Every share you own contributes $0.10 to your monthly income. There is no need to estimate yield or worry about fluctuating dividends. You simply decide how much income you want and calculate how many shares are required.
How Many Shares Do You Need for $100 per Month?
To earn $100 per month, you divide your income target by the monthly payout per share.
$100 ÷ $0.10 = 1,000 shares
Owning 1,000 shares of EIT.UN produces $100 in monthly income, or $1,200 per year. When held inside a TFSA, those payments are not subject to tax, which makes the effective income especially attractive.
How Much Capital Do You Need to Invest?
Once you know the number of shares, the final step is calculating the total investment required. As of December 17, EIT.UN was trading at approximately $15.77 per share.
1,000 shares × $15.77 = $15,770
In other words, you would need to invest about $15,770 inside your TFSA to generate $100 per month in tax free income from this fund.
Things to Be Aware of
While the math is simple, it is important to understand what you are buying. EIT.UN is an actively managed closed-end fund that holds a relatively concentrated portfolio of about 40 Canadian and U.S. stocks, roughly split 50/50. It is designed for income first, not maximum growth.
At the current price, the distribution implies a yield of about 7.6%, which is higher than most broad market ETFs. However, the fund’s market price can trade above or below its net asset value (NAV). At the time of writing, the market price was below NAV, meaning investors could buy the portfolio at a discount. There is no guarantee that discount will ever close.
There are also trade-offs. The management expense ratio is relatively high at about 1.1%. The fund is also permitted to use leverage of up to 1.2 times, meaning it can borrow to invest. That can enhance income and returns, but it also increases downside risk during market downturns.
