The Tax-Free Savings Account (TFSA) is one of the best ways for Canadians to generate a tax-free monthly cash flow. To help meet that goal, investors need to pick the right investments that can provide a stable and recurring source of income.
You get predictability and the benefit of steady compounding when your TFSA pays you monthly. Instead of waiting for that next quarterly or annual payout, a more frequent cadence means that reinvestments are done sooner, which can provide a boost over time.
Adding to that, note that in a TFSA, distributions are tax-free, and when reinvested, those payouts will compound faster than in a taxable account.
So then, what exchange-traded fund (ETF) should investors turn to to generate that tax-free monthly cash flow? One option to consider is BMO Monthly Income ETF (TSX:ZMI).
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How does the ETF generate income?
BMO Monthly Income ETF is a multi-asset fund designed to provide monthly income. The fund is considered a fund of funds, meaning that its composition is made up of different ETFs that include both stocks and bonds.
That mix gives the fund a balanced feel, offering both stability and steady income. That structure also means that the monthly payout comes from different sources such as dividends, bond interest, and the yields from the ETF’s holdings.
For TFSA investors who are seeking tax-free monthly cash flow, that structure can be appealing. Investors get exposure to the markets, a more diversified and smoother experience than equity-focused ETFs, and a recurring, stable stream of monthly payouts.
Let’s talk about that payout and what it means for investors
One of the most appealing aspects of any investment that’s focused on generating tax-free monthly cash flow is the distribution. In the case of BMO Monthly Income ETF, the yield currently offers an annualized 3.3% yield as of the time of writing.
For TFSA investors, this means that BMO Monthly Income ETF can provide a monthly cash flow without excessive risk. In fact, the moderate yield offered provides a good balance between long-term growth and generating monthly income.
By way of example, let’s consider two examples.
First, we have an investor who’s still building their portfolio. An investment of $8,000 into BMO Monthly Income ETF will generate a new share each month from that initial reinvestment alone.
Alternatively, we can also look at an investor with a more established portfolio of $200,000 that was built up over the years. That investment in BMO Monthly Income ETF will earn over $500 each month without touching the principal.
Both provide tax-free monthly cash flow with minimal risk exposure.
Start generating tax-free monthly cash flow
BMO Monthly Income ETF is appealing to investors looking to build out a TFSA-focused income strategy. In fact, there are a few reasons why this is appealing.
First, there’s the tax-free structure of the TFSA. The monthly distributions from the fund, when reinvested, can provide compounding growth more efficiently without any tax drag.
Then there’s the diversified nature of the fund. As a fund-of-funds, BMO Monthly Income ETF offers investors a more diversified mix than picking a pure ETF or stocks directly. The mix of both funds and bonds provides a balance that makes it easier to stay invested through market cycles.
Finally, there’s the monthly payout schedule itself. The ETF’s monthly distributions make it easier for investors to plan around consistent, predictable cash flow. For investors seeking passive income, this represents a hands-off way to earn tax-free monthly cash flow.
Irrespective of whether the goal is income or growth, this ETF is a low-maintenance option for any diversified portfolio. That payment can then be directed toward reinvestments or other portfolio goals.
Final thoughts
BMO Monthly Income ETF offers investors a straightforward path to building tax-free monthly cash flow inside a TFSA. Its diversified structure, yield, and monthly distribution schedule make it a strong fit for investors seeking stability and income.
Investors looking to power up their TFSA with a balanced, income-focused ETF will find that BMO Monthly Income ETF can be a strong addition to any well-diversified portfolio.
