An extra $500 per month arriving completely tax free can go a lot further than many people think. That could cover groceries, utilities, a car payment, insurance, or simply create a bit more breathing room in your monthly budget. And because the income comes from a Tax-Free Savings Account (TFSA), none of those withdrawals increases your taxable income.
One way some Canadians try to generate that level of passive income is through Canoe EIT Income Fund (TSX: EIT.UN), a closed-end income fund that currently pays a monthly distribution of $0.10 per share. This is different than exchange-traded funds (ETFs) and dividend stocks, though, so read on for the specifics.
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Doing the passive-income math first
The math itself is fairly straightforward. To generate $500 per month tax-free from EIT.UN in a TFSA, you would need the following:
That means owning 5,000 shares of EIT.UN. Using a share price of $17.20 as of May 14, the total investment required would be this:
So, investors would need approximately $86,000 invested inside a TFSA in EIT.UN to target around $500 per month in tax-free income.
Hold up — understand what you’re buying first
Before chasing the yield, though, it is important to understand what EIT.UN actually is. This is an actively managed closed-end income fund holding a diversified portfolio of Canadian and U.S. stocks.
The fund is currently managed by Robert Taylor, a chartered professional accountant and chartered financial analyst, and the portfolio holds just under 50 stocks across sectors like financials, energy, and industrials.
One major reason the yield is so high is that the fund uses leverage. EIT.UN is permitted to borrow up to 120%, or 1.2 times of its net asset value (NAV), which can help amplify returns and yield during stronger markets but also increases downside risk during weaker ones.
The fund also charges a relatively high 1.1% management fee compared to low-cost index ETFs. Borrowing costs tied to leverage can create additional expense drag as well, on top of this.
Another detail investors should understand is that EIT.UN sometimes trades at a discount or premium to its NAV. In simple terms, the market price of the fund can differ from the value of the underlying portfolio holdings themselves. Most of the time, you can buy it at a slight discount, but there’s no guarantee it will ever close.
Historically, though, the strategy has delivered fairly strong total returns. With distributions reinvested, EIT.UN compounded at roughly 18.46% annualized over the past five years, but this is before taxes.
Of course, investors should remember that distributions are not guaranteed. The payout can fluctuate depending on market conditions, leverage costs, and portfolio performance. Principal losses are also possible.
