For Canadians who have been diligently maxing out their Tax-Free Savings Account (TFSA) since it launched, $109,000 is an important milestone. That’s the cumulative contribution room available for those eligible from 2009 through 2026.
Of course, a $109,000 TFSA doesn’t necessarily mean an investor has $109,000 in cash. Contributions could have been invested in stocks, exchange-traded funds (ETFs), or other assets and potentially grown substantially over the years. But what if you had $109,000 available today and wanted to turn it into tax-free monthly income?
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A high-yield ETF could generate about $570 monthly
One straightforward option is an income-focused ETF, such as BMO Global High Dividend Covered Call ETF (TSX: ZWG). With a yield of roughly 6.3%, a $109,000 investment could generate approximately $6,867 annually, or about $572 per month, assuming the distribution rate stayed the same.
ZWG provides exposure to dividend-paying companies around the world while using a covered-call strategy to generate additional income. Its portfolio includes major companies such as Merck, AbbVie, Apple, Cisco, and Microsoft.
The appeal is obvious for income-focused TFSA investors: the cash distributions can be received tax-free inside the account, potentially creating a useful stream of spending money without triggering personal income tax.
There are trade-offs, however. ZWG has a relatively high management expense ratio of 0.72%, and covered calls can limit upside when markets surge. Option premiums may provide some downside cushion, but they don’t eliminate the risk of losses. Investors should also remember that ETF distributions aren’t guaranteed. As well, for U.S. stocks, there’s a 15% tax automatically deducted by the U.S. government before the dividend enters your TFSA.
Building your own income portfolio offers more control
Investors willing to do more research could instead build a portfolio of individual dividend-paying stocks. This approach requires more work and patience, but it could provide greater control over both income and long-term growth.
Granite REIT (TSX: GRT.UN), for example, could be an interesting stock to watch and a potential buy on dips. The Canadian real estate investment trust (REIT) owns a diversified portfolio of logistics, warehouse, and industrial properties across North America and Europe.
Granite REIT has 139 income-producing properties and six development properties, representing about 61.5 million square feet. Its high committed occupancy rate of 98.1% and relatively long weighted-average lease term of about five years provide investors with a degree of visibility into future rental income.
Perhaps more compelling for long-term TFSA investors is Granite REIT’s distribution history. The REIT has increased its distribution for roughly 15 consecutive years, while its 10-year distribution growth rate was around 4%. A payout ratio near 65% also suggests room for continued distribution growth, although no distribution increase is guaranteed.
Income today matters, but growth matters more
A diversified portfolio yielding 4% would produce about $4,360 annually, or $363 per month, from a $109,000 TFSA.
That’s less income than a 6.3%-yielding ETF could currently provide. But investors shouldn’t automatically chase the highest yields. A growing distribution, combined with capital appreciation, can potentially create a much larger income stream over time.
The bottom line
A $109,000 TFSA could potentially generate roughly $572 monthly from a 6.3%-yielding covered-call ETF, while a 4%-yielding portfolio could produce about $363 monthly. For long-term investors, however, the best TFSA strategy may be to balance current income with sustainable distribution growth and total returns.
