How Much You Really Need in a TFSA to Make $500 a Month

Do you want to make $500 per month in your tax-free savings account (TFSA)?

Going by Google search data, a lot of Canadians do.

Everybody knows it’s possible to get monthly income by investing in dividend stocks. But amounts that actually make a difference? That’s tough.

$500 monthly is a popular round number that many think signifies progress in a dividend investing strategy. Indeed, it can cover most Canadians’ cellular and internet bills – perhaps even utilities in the Summer months.

So if you achieve $500 worth of monthly income in your TFSA, you’ve made a real step toward financial independence. Get all the way to $2,000 tax free a month, and you may even be able to cover all of your expenses in parts of New Brunswick and Newfoundland!

The trouble, of course, is getting that amount without resorting to risky high-yield stocks. Such stocks are often at grave risk of dividend cuts – if you don’t believe me, Google “Canadian telco dividend cuts,” and prepare to pick your jaw up off the floor. Yet with a $109,000 maximum lifetime contribution limit, the TFSA is not exactly room. Absent significant past gains and/or future contributions. But it’s a certainty that the Sun will rise tomorrow, so planning for a future TFSA balance is not an unreasonable thing to do. In this article, I’ll explore how much you’d need to invest in a TFSA to get $500 per month in dividends.

About $303,000 (holding the market)

If you hold a broad market index fund, you need about $303,000 invested to get $500 per month (on average) in TFSA income. This amount is far in excess of the contribution room that has accumulated since the TFSA was launched in 2009. But if you’ve already made big gains in your TFSA, or are committed to contributing consistently over the next decade, you can get there.

Take the iShares S&P/TSX 60 Index Fund (TSX: XIU), for example. It’s a Canadian index fund focused on the TSX 60 Index, an S&P Global Index of Canadian large cap stocks. It yields about 2%. So if you invest $303,000 in it, you’ll get $7,172 per year in passive income (assuming the yield doesn’t change). That works out to more than $500 per month. See the table below.

$204,000 (with a dividend tilt)

Now, investing $303,000 to get just over $500 a month might sound like a depressing prospect. “All that cash just for $597 per month? SERIOUSLY?,” you might be thinking. And it’s true: yields are pretty low these days. But you can get there with somewhat less invested up-front by buying a dividend-tilted fund.

Take the Vanguard FTSE Canada High Yield Dividend ETF (TSX: VDY). It’s a Canadian large cap fund similar to XIU. However, instead of tracking all Canadian large caps, it tracks only large cap high yield names. As a result, it has a 2.9% dividend yield, much higher than Canadian market averages right now. Also, unlike XIU, VDY actually pays its dividends monthly – so we’re talking literal monthly income in this case. With $204,000 invested in it, you should get about $500 per month in income, as the table below shows.

The uncomfortable truth

As the examples above show, it’s possible to generate $500 per month by investing in defensive stocks. The unfortunate truth, though, is that this generally takes more money than there is TFSA contribution room. If you’ve grown your $200,000 through past investments, then maybe you can get $500 per month now. But if you have a smaller amount, I wouldn’t go pushing it with risky high yield stocks just to achieve an arbitrary monthly income goal.