If you’ve got a TFSA (Tax-Free Savings Account) that’s heavy in cash (let’s say around three years’ worth of maximum allowable contributions), it might be a smarter idea to put it to work in income-generating securities that can produce more than the (low) interest produced by your bank’s tax-free savings accounts. Indeed, a TFSA might be called a savings account, but Canadian investors, especially those with extended investment horizons (think five years or more), would likely get far better mileage by investing in equities.
Sure, equities can be volatile, and yes, you can lose money, especially if you’ve got an appetite for speculating on what’s hot (these days, it’s semiconductor stocks fuelling the AI trade), but at the same time, you can do very well by owning the broad indices (a TSX-focused ETF or something else) or picking stocks that you believe to be undervalued at any given point in time.
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Income hunting for a TFSA in this climate?
In this piece, we’ll look at ways for a new TFSA investor to put their first few years’ contributions to work in a way that’s more productive than those low-interest savings accounts with interest rates south of 1%.
As inflation sticks around and the Bank of Canada looks to increase rates, the case for investing, I think, to stay ahead and move farther ahead is made that much stronger, especially for those with more of a value focus and willingness to scoop up what most other investors might not wish to hang onto any longer.
Regarding TFSA income, which can work wonders as it generates tax-free passive income, there’s no shortage of specialty income ETFs that can offer yields north of 5% or even 6%.
But with variable yields (based on a number of factors, especially covered-call ETFs), higher management expense ratios (that come out of your pocket, by the way), relatively limited trading histories, and difficult-to-predict performance, I must say that I’m a bigger fan of simplicity than reaching for a higher yield by making trade-offs that entail greater risk, capped upside, or a combination of both.
In my humble opinion, passive income investors should seek to maximize not just the yield, but the safety, steadiness, and value to be had from every investment to be bought, especially for a TFSA. That means putting money into quality income payers, rather than chasing what pays most with little regard for anything else (appreciation potential, value, and distribution growth).
BMO Equal Weight REITs Index ETF
In my view, I’d much rather go down the route of a steady, income-focused equity ETF. The BMO Equal Weight REITs Index ETF (TSX: ZRE) looks quite intriguing, especially since the nice distributions would be free from taxation. Since the Canadian dividend tax credit doesn’t apply to REIT distributions, I’d argue that REITs make a lot of sense for an income investor’s TFSA.
Right now, the ZRE has a fairly lofty yield of 4.6%, thanks in part to a vicious sell-off that hit the space way back in July. Indeed, as rate hike fears rise, REITs tend to take the hit well in advance. If you’ve got a long-term horizon, I think higher rate expectations are priced in such that investors are getting a pretty good deal here as we enter Q4 2026.
Now down close to 11% from 52-week highs, the REIT scene is that much cheaper, with yields that are that much more bountiful.
Of course, a 4.6% yield might not cut it for some, but if you want more value and less yield volatility, I think it’s hard to match the often-overlooked Canadian REIT plays. I think the broad basket is worth careful consideration, whether you’re a value hunter or a passive income investor who’d like to take on the role of a lazy landlord.
As always, diversification is your best friend. So, don’t just go all-in on the REITs. Combined with index ETFs and a few individual dividend stocks, I think your TFSA could be set for success and outsized passive income.
