How to Generate $500/Month Tax-Free Using a TFSA

Earning $500 per month tax-free is possible, with the right investments and the discipline to invest smartly in a Tax-Free Savings Account.

Key Points
  • Use a TFSA to build tax‑free passive income by reinvesting dividends; the article shows an illustrative split between Freehold Royalties (FRU) and Plaza Retail REIT (PLZ.UN) that would generate about $500/month.
  • FRU is a monthly‑paying oil & gas royalties company (roughly a 6.12% yield) and PLZ.UN is a monthly‑paying retail REIT with high occupancy, both supplying steady monthly distributions.
  • Reaching $500/month requires significant capital and time—this example is illustrative, so diversify across several monthly payers and be patient rather than relying on just two names.

There used to be a time when doing a job was more than enough to take care of your expenses and still have money left over to go toward savings for your long-term goals. That was years ago. Now, having additional income streams is necessary for everyone. Fortunately, Canadians have plenty of ways to create a passive income that can improve their purchasing power and help them fulfill their dreams of financial freedom.

The Tax-Free Savings Account (TFSA) is one of the best ways to make more money and do so without paying taxes on the earnings. My approach would be to build a self-directed portfolio of dividend stocks and hold it in a TFSA. By reinvesting the dividends you earn, you can unlock the power of compounding to accelerate your wealth growth. Eventually, you can grow your portfolio enough to start generating $500 per month tax-free!

Here’s a quick look at a table showing how that is technically possible:

TickerRecent PriceDividends Per Share Per MonthNumber of SharesTotal Monthly Payout
FRU$17.66$0.092,778$250.02
PLZ.UN$4.45$0.0233310,716$250
Total Monthly Earnings$500.02
Colored pins on calendar showing a month

Source: Getty Images

Freehold Royalties

Freehold Royalties Ltd. (TSX: FRU) is a monthly dividend stock that boasts a $2.9 billion market capitalization and a business model that can comfortably fund its monthly payouts to investors. Freehold Royalties has been engaged in acquiring and managing oil and gas royalties since 1996. The firm does not produce crude oil or natural gas itself. Instead, it lets others use its position to earn money like a landlord and charges industry operators to generate strong cash flows.

It owns a sizeable portfolio of properties that produce oil and natural gas in the US and Canada. The Middle East crisis might be bad for the consumer due to higher gas prices. However, higher prices benefit FRU stock as demand for Canadian energy grows to meet demand. As of this writing, FRU stock trades for $17.66 per share and pays $0.09 per share each month, translating to a juicy 6.1% annualized dividend yield that you can lock into your portfolio today.

Plaza Retail REIT

Plaza Retail REIT (TSX: PLZ.UN) is a Real Estate Investment Trust (REIT) that can help you earn monthly and tax-free income like a landlord but without the massive cash outlay or the hassles that come with being one. The $491.56 million market-capitalization open-ended REIT is a leading property owner and developer in Ontario, Quebec, and Atlantic Canada.

Its portfolio includes around 8.8 million square feet of prime real estate that is predominantly occupied by national-level tenants with a focus on essential needs. The trust has additional lands that are ready for development. With around 200 properties under its belt, high occupancy rates, and strong rental income, it can be an excellent investment for monthly dividend income.

Foolish takeaway

Earning $500 per month or more is possible with a TFSA. However, it is not something you can achieve overnight. The example of Freehold Royalties stock and Plaza Retail REIT is to illustrate how earning that amount is possible with investments held in a TFSA. However, getting your TFSA portfolio to that level will take plenty of time, patience, and discipline.

When you begin building such a portfolio, these two stocks can be solid foundations to start your self-directed investment portfolio. Beyond that, diversifying your investment capital across several high-quality dividend stocks can preserve capital while keeping the dividends coming.

Fool contributor Adam Othman has no position in any of the stocks mentioned. The Motley Fool recommends Freehold Royalties. The Motley Fool has a disclosure policy.

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