If I had $25,000 in a Tax-Free Savings Account (TFSA) and wanted to turn it into a steady stream of passive income, I wouldn’t necessarily build a complicated portfolio of individual dividend stocks. I’d prioritize simplicity.
Ideally, I’d want one diversified investment with a predictable monthly payout that I could either withdraw and spend or reinvest. One way to accomplish that is through a fund with a managed distribution policy, where the manager targets a relatively consistent payout instead of simply passing along whatever dividends the portfolio happens to generate each month.
One long-standing Canadian example is Canoe EIT Income Fund (TSX:EIT.UN). It isn’t an exchange-traded fund (ETF), but rather a closed-end investment fund. Its $0.10 monthly distribution has made it popular with Canadian income investors. With $25,000, that distribution can already produce a meaningful amount of tax-free monthly cash flow.
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What is EIT.UN?
EIT.UN is an actively managed portfolio primarily holding dividend-paying North American equities. Rather than simply tracking an index, management selects investments with an emphasis on generating income and long-term capital appreciation.
The portfolio provides exposure across numerous sectors and companies, giving investors considerably more diversification than relying on a handful of individual dividend stocks.
The fund also uses approximately 1.2 times leverage. In simple terms, it borrows money to increase its investment exposure. That can amplify income and gains when its holdings perform well, but it can also magnify losses when markets decline.
That additional complexity comes at a price. EIT.UN charges a 1.1% management fee, making it considerably more expensive than a conventional index ETF. There are several other numbers worth knowing as of August 13.
EIT.UN closed at $17.83 per unit while its net asset value (NAV) was $18.18. In other words, investors were getting a discount to the underlying value of the portfolio, which is generally a good thing.
Its annualized distribution yield was 6.73%, while its 10-year annualized total return was 14.02% with distributions reinvested. That last figure is important because I don’t judge an income fund by its distribution alone.
What ultimately matters is total return after accounting for both the cash paid out and changes in the value of your investment. By that measure, EIT.UN has actually performed very well historically.
What $25,000 could generate
Now let’s get to the income. At an August 13 closing price of $19.83, a $25,000 investment would buy approximately 1,260 whole units of EIT.UN for $24,985.80, leaving $14.20 uninvested.
EIT.UN currently pays $0.10 per unit each month. Multiply 1,260 units by $0.10, and you’re looking at approximately $126 per month. That’s about $1,512 annually if the distribution remains unchanged.
Inside a TFSA, those distributions can accumulate without Canadian income tax. You could withdraw the $126 each month for spending money or reinvest it while you’re still working and allow your position to compound.
The important caveat is that the $0.10 distribution isn’t guaranteed. A managed distribution can include income, capital gains, potential return of capital, and EIT.UN’s use of leverage introduces additional risk.
But if the objective is turning $25,000 into a relatively predictable monthly cash flow stream without assembling and managing dozens of individual investments, EIT.UN is one option worth understanding.
