How to Convert $25,000 in TFSA Savings Into Reliable Cash Flow

A Tax-Free Savings Account (TFSA) is the perfect account for growing and compounding cash flows. By allowing you to grow, invest and withdraw your money tax-free, the TFSA effectively boosts your returns. The ‘returns you actually take home are after-tax returns, so holding investments in a TFSA is economically rational.

Because it makes every invested dollar go further, the TFSA can get you a relatively large amount of cash flow with relatively little invested. Starting with just $25,000 in investments, you can get to the point where you’re getting a few hundred dollars per month in extra tax-free income. In this article, I explore how you can get reliable cash flow coming into your TFSA, starting with just $25,000.

Step #1: Set a cash flow goal

Before you can get a satisfactory amount of cash flow coming into your TFSA regularly, you need to know how much cash flow you’d be satisfied with. This is a pretty important piece of the picture, because your personal “amount” may or may not be feasible.

The TSX currently has a dividend yield of about 2.3%. You can get that up to 4% by screening for only dividend stocks with relatively high (let’s say +3%) yields. $25,000 invested at a 4% yield is $1,000 per year in dividends, which is $250 per quarter or $83.3 per month.

$83.3 per month may not seem like much, but it’s a start. Also, by adding a little to your TFSA every month, and with some dividend hikes, you can grow your income over time.

Step #2: Invest a little from every paycheque

It follows logically from my final sentence under step one that you should progressively add to your TFSA over time. If you were 18 or older in 2009, and never contributed to a TFSA before now, then you can contribute $109,000 all at once! That’s not to say you actually should contribute that much all at once. It probably makes more sense to invest a little from each paycheque than to invest a lump sum. Regardless of how you do it, adding to your TFSA progressively over time is a good way to get your dividend income up.

Step #3: Re-invest all dividends

Once you’ve got your TFSA investments lined up, all that’s left to do is re-invest the dividends that you have coming in.

The way it works is pretty simple.

Let’s say you have $25,000 invested in Fortis (TSX:FTS) stock. Fortis pays a $0.64 quarterly or $2.56 annual dividend. With its $78.51 stock price, that provides a 3.26% dividend yield. So, your $25,000 Fortis position pays you $815 per year.

So, you have $203.52 per quarter worth of dividend income coming in. To re-invest it, you don’t need to manually place any trades. You simply arrange to have your broker, or even Fortis itself, manage your dividend-reinvestment plan (DRIP) for you. That way, every $203.52 payment automatically gets re-invested, increasing your rate of compounding. Over time, doing this tends to increase your returns.