The Tax-Free Savings Account (TFSA) is an excellent wealth-building account for Canadian investors. That’s because the TFSA offers tax-free growth on investments and dividends held within the account. For investors, this means maximizing that TFSA contribution room to attain recurring monthly cash flow.
Building a monthly cash flow doesn’t require chasing the highest yields. A better approach is picking investments that provide regular distributions that are backed by established businesses.
Fortunately, there are several great options on the market to consider. The key is focusing on investments that can turn TFSA contribution room into recurring income without relying too much on one stock or one sector.
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Why monthly cash flow?
Most investments pay out on a quarterly cadence. But bills don’t come in once a quarter. This makes receiving monthly cash flow more tangible.
Those benefits apply to investors who aren’t ready to draw on that income yet. Monthly payers are often viewed as retiree investments because the payouts line up with recurring expenses.
In fact, reinvesting on a monthly cadence allows investors to see the effects of that monthly distribution compounding on a quicker basis.
When you factor in the tax-free growth that a TFSA offers, that makes for a powerful motivator.
So then, what are the three investments to point at that unused TFSA contribution room?
Let’s look at each.
Generate income from defensive, necessity-based retail
The first option for that unused TFSA contribution room is SmartCentres REIT (TSX: SRU.UN). SmartCentres is a REIT that is focused on necessity-based retail.
The REIT owns a large portfolio of properties, primarily in major metro markets. The necessity-based retail focus helps drive steady customer traffic.
The properties often include smaller secondary tenants as well as major anchor tenants. Speaking of anchor tenants, many of SmartCentres’ properties are anchored by Walmart. That adds traffic appeal for shoppers and defensive appeal for investors.
Turning to income, SmartCentres offers a monthly distribution with a yield of 6.1%. For TFSA investors, this makes SmartCentres a great candidate for some of that TFSA contribution room.
Add diversified urban real estate exposure
Another great option for any income-focused portfolio is RioCan Real Estate (TSX: REI.UN). RioCan is another Canadian REIT that offers a monthly distribution.
Like SmartCentres, RioCan’s portfolio has historically leaned to retail, but that mix has shifted in recent years. RioCan has moved more towards incorporating mixed-use residential properties into its portfolio.
The properties are in major metro markets along transit corridors, where demand is strong. The properties themselves are residential towers sitting atop several floors of retail. That lets RioCan address housing demand while adding traffic to its retail sites.
This gives investors a slightly different angle. The properties are connected to areas where people live, shop, commute, and work.
Turning to income, as of the time of writing, the REIT offers a yield of 5.1%, making it an attractive option for investors looking to turn TFSA contribution room into income.
Consider adding covered call income into the mix
The final piece of this income-producing portfolio is BMO CA High Dividend Covered Call ETF (TSX: ZWC), which is a covered call ETF.
The covered call ETF is composed of Canadian high-dividend stocks. This makes it a far more diversified pick over the other two REITs mentioned above.
Rather than owning one company, investors of this ETF are getting exposure to a diversified basket of dividend stocks across several sectors of the market.
The fund also utilizes a covered call strategy to generate additional income. That helps to bolster the monthly payout, but that upside is also limited when stocks rise sharply.
As of the time of writing, the ETF provides a yield of 5.7% that is paid out on a monthly cadence.
Prospective investors should note that the focus of this ETF is on income generation, not capital growth. Still, the fund has broadly followed the market, reflecting growth of over 20% in the trailing 12-month period.
Turning TFSA contribution room into monthly cash flow
Together, these three investments create a monthly income mix. SmartCentres and RioCan add real estate exposure, while the BMO High Dividend Covered Call ETF adds broader Canadian dividend exposure.
In my opinion, one or all should be positions in any larger income-focused portfolio.
