Use a TFSA to Make $500 in Monthly Tax-Free Income

Passive income has become increasingly important in today’s uncertain environment, characterized by geopolitical tensions, persistent inflation, and slowing economic growth. In addition to providing a reliable source of cash flow, it can help preserve purchasing power and enhance long-term wealth through compounding when dividends are reinvested.

One of the simplest and most cost-effective ways to generate passive income is by investing in high-quality TSX stocks that pay monthly dividends. An investment of $108,000 split equally between the following two companies can generate more than $500 in monthly income. Better yet, holding these investments in a Tax-Free Savings Account (TFSA) allows investors to earn tax-free dividend income and capital gains. For 2026, the TFSA annual contribution limit is $7,000, while the cumulative contribution room for eligible Canadians stands at $109,000.

With that in mind, let’s take a closer look at these two Canadian dividend stocks.

CT Real Estate Investment Trust

First on my list is CT Real Estate Investment Trust (TSX:CRT.UN), which owns and operates 378 retail-focused properties comprising approximately 31.8 million square feet of gross leasable area. Canadian Tire occupies nearly 29.2 million square feet, representing 92.1% of the REIT’s total gross leasable area. Backed by this high-quality anchor tenant, CT REIT has consistently maintained strong occupancy levels across economic cycles, with an impressive 99.4% occupancy rate at the end of the first quarter. This stability supports reliable rental income and predictable cash flows.

The REIT also benefits from an efficient operating model, with general and administrative expenses accounting for just 2.5% of total revenue, supporting healthy profitability and cash flow generation. Backed by these dependable cash flows, CT REIT has increased its distributions 10 times since 2017, while its forward dividend yield currently stands at 5.3%.

Looking ahead, favourable industry fundamentals should continue to support the REIT’s growth. Demand for retail space in Canada remains healthy, while limited new supply, driven by elevated construction costs, has created a supportive leasing environment. Against this backdrop, CT REIT is expanding its portfolio, with approximately 629,000 square feet of development projects currently underway, representing nearly $380 million in investments. These projects could drive long-term growth in rental revenue and cash flows, while contractual rent escalations embedded in many of its leases should help offset inflation over time. Given its resilient business model, stable cash flows, and a visible development pipeline, CT REIT appears well-positioned to continue delivering attractive, growing passive income for long-term investors.

Peyto Exploration & Development

Another stock that I believe is well-suited for income-seeking investors is Peyto Exploration & Development (TSX:PEY), which produces natural gas and natural gas liquids in Alberta’s Deep Basin. Backed by its low-cost operations, long-life reserve base, and disciplined capital allocation, the company has consistently delivered strong returns for shareholders. Over the past 27 years, Peyto has generated an average return on capital employed (ROCE) of 17% and an average return on equity (ROE) of 24%.

Supported by its consistent financial performance, the company has returned approximately $3.4 billion to shareholders through dividends since its inception. Its current monthly payout of $0.12 per share yields 5.9% on a forward basis.

Looking ahead, Peyto remains well-positioned to sustain its growth. The company has approximately 1.5 billion barrels of oil equivalent in proved and probable reserves, providing a solid foundation for long-term production and cash flow growth. It also plans to invest between $540 million and $600 million this year, including drilling 70 to 80 net horizontal wells to expand production. These investments should support higher earnings, stronger free cash flow, and sustainable monthly dividend payments over the long term. In addition, Peyto could benefit from higher energy prices amid persistent geopolitical tensions in the Middle East. Given its disciplined operating strategy, solid financial performance, and favourable long-term outlook, Peyto appears well-positioned to continue generating attractive, growing income for its shareholders.