How to Use a TFSA to Bring in $500 a Month Completely Tax-Free

H&R REIT (TSX:HR.UN) could produce nearly $500 per month tax-free in a maxed out TFSA.

Key Points
  • Generating $500 monthly tax-free income requires a 5.5% annualized yield in a maxed-out in a $109,000 TFSA. Such yields are frequently found in monthly-paying Canadian Real Estate Investment Trusts (REITs).
  • H&R REIT provides defensive diversification by pairing a high-occupancy Canadian industrial portfolio with U.S.-based residential holdings, hedging against overextended domestic consumer real estate markets.
  • Industrial real estate operators stand to directly benefit from Canada's accelerating data centre buildout, though investors must balance this structural growth optionality against high capital expenditure development risks.

Did you know that you can use a tax-free savings account (TFSA) to bring in $500 per month completely tax-free?

It might seem unbelievable, but it’s true.

The current maximum TFSA contribution limit – barring past contributions, very young age, and periods of living abroad – is $109,000. It takes a 5.5% dividend/interest yield to get $500 per month from $109,000 worth of a monthly-paying security.

Such yields are often found among real estate investment trusts (REITs). REITs have above-average yields by the standards of Canadian stocks, and their dividends are frequently paid out monthly. REITs have been out of favour for a while now, and housing REITs may stay out of favour with the Canadian homeowner/renter being so financially strained, but certain industrial and office REITs may be set for strength in the years ahead. In this article, I’ll explore a Canadian REIT that has roughly a 5.5% yield that could fill a maxed out $109,000 TFSA with income for years into the future.

the word REIT is an acronym for real estate investment trust

Source: Getty Images

H&R Real Estate Investment Trust

H&R Real Estate Investment Trust (TSX: HR.UN) is a Canadian mixed-use REIT that owns residential, industrial and office properties across Canada and the United States. The company’s residential portfolio is largely based in the United States. I view this as a positive because U.S. rents are generally cheaper than Canada’s on average, and the housing market is generally less of a concern than Canada’s is (outside of a few mega cities like New York and San Francisco). The company has a number of units under development, indicating a commitment to growth, and its occupancy rate in many of its industrial properties is 100%!

Industrial REITs: a major opportunity

Industrial REITs currently represent a major opportunity amid Canada’s data centre buildout. Canada currently has five data centres, with 96 more planned for or under construction. Industrial REITs have ways of profiting from data centres. First, some of their facilities have the characteristics required to house data centres inside them; second, industrial REITs have the opportunity to invest in data centres themselves. This could be an opportunity for H&R REIT. While industrial REIT rents have, in some cases, stagnated due to U.S. tariffs on things like cars, specific areas of the industrial REIT space look promising in Canada. So, HR.UN has a real opportunity set in front of it.

Note that none of the above means that H&R REIT will actually thrive. It has a massive list of development projects currently underway on its websites; these will cost billions to build out. There is a real risk of financial stress here. However, there is opportunity as well.

Dividend potential

Assuming all goes well with H&R REIT’s real estate buildout, the company could potentially produce a consistent $491.43 per month in a TFSA. Here’s the math on that:

COMPANYRECENT PRICENUMBER OF SHARESDIVIDENDTOTAL PAYOUTFREQUENCY
H&R Reit$11.099,829$0.05 per month ($0.60 per year)$491.45 per month ($5,897.40 per year)Monthly

As you can see, a $109,000 TFSA fully invested in H&R REIT – were the company to keep paying its current dividend indefinitely – would produce an amount approaching $500 per month. Of course, an actual, fully maxed-out TFSA would have to be diversified – putting all your money in HR.UN would be ill-advised. But the example explored in this article goes to show how much of an income supplement a fully maxed-out TFSA can produce.

Fool contributor Andrew Button has no positions in the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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