The benefit of a Tax-Free Savings Account (TFSA) is often understated, as real value is derived in the long term, unlike a Registered Retirement Savings Plan (RRSP) that gives immediate tax benefits. You can start investing in a TFSA as early as age 19. It can be a great tool to earn a monthly passive income as the withdrawals are tax-free. By the time you move to a higher income bracket, you will have a tax-free passive income source coming in. At that time, you can channel your savings toward minimizing taxes through RRSP contributions.
Source: Getty Images
How to use a TFSA to generate an average $500 in monthly tax-free income
One strategy to consider is to look for a stock with a 6% average dividend yield and invest what you want as the payout. If you want $500 per month as a payout, invest $500 every month, or $6,000 annually. Instead of taking the cash dividend, reinvest it in other 6% yield stocks. Since it is a TFSA, you can reinvest tax-free. After 12–15 years, you can earn the same amount as the payout.
Two stocks worth considering for a 6% yield are Enbridge (TSX: ENB) and CT REIT. Now is a perfect time to invest in Enbridge as the stock has dipped after the company announced the acquisition of Tallgrass Energy’s crude oil business and raised equity financing for the same. Enbridge stock has dipped 17% since August and is trading closer to its 52-week low of $62.42. Enbridge’s management is confident it can meet its 2026 outlook as the deal is expected to close by the end of 2026 and is unlikely to affect 2026 guidance. However, investors should watch for the 2027 guidance.
The company’s accelerated $41 billion capital expenditure by 2030 could drive up the share price as projects come online. It may postpone Enbridge’s plan to accelerate dividend growth to 5%. Even if the acquisition and capex affects Enbridge’s 2027 fundamentals, the company can sustain current dividends and grow them by 3% as they are funded by the distributable cash flow (DCF) of existing pipelines.
How Enbridge can earn your average $500 in monthly TFSA income
To build an expected payout and investment strategy, you need to build assumptions and expectations based on your research on what makes the stock investment worthy.
For Enbridge, the assumption is 3% annual dividend growth and a 20% stock price rally up to 2030, followed by 5% dividend growth and stock price stagnation. Enbridge has suspended its dividend reinvestment plan, but you can use the dividend to buy more shares of Enbridge or CT REIT. If these estimates materialize, a $6,000 investment per year for 14 years could earn $543 per month, or $6,517 in annual dividends.
| Estimated Stock Price | Year | Enbridge shares purchased from $6,000 | Enbridge shares purchased from dividends | Total Share Count | Dividend per Share | Total Dividends |
| $66.48 | 2026 | 90 | 90 | $3.88 | $87.30 | |
| $79.78 | 2027 | 75 | 1 | 166 | $4.00 | $663.40 |
| $95.73 | 2028 | 63 | 7 | 236 | $4.12 | $971.44 |
| $114.88 | 2029 | 52 | 8 | 296 | $4.24 | $1,254.98 |
| $137.85 | 2030 | 44 | 9 | 349 | $4.37 | $1,524.07 |
| $137.00 | 2031 | 44 | 11 | 404 | $4.59 | $1,852.47 |
| $137.00 | 2032 | 44 | 14 | 462 | $4.81 | $2,224.34 |
| $137.00 | 2033 | 44 | 16 | 522 | $5.06 | $2,638.88 |
| $137.00 | 2034 | 44 | 19 | 585 | $5.31 | $3,105.23 |
| $137.00 | 2035 | 44 | 23 | 652 | $5.57 | $3,633.91 |
| $137.00 | 2036 | 44 | 26 | 722 | $5.85 | $4,225.26 |
| $137.00 | 2037 | 44 | 31 | 797 | $6.14 | $4,897.38 |
| $137.00 | 2038 | 44 | 36 | 877 | $6.45 | $5,658.41 |
| $137.00 | 2039 | 44 | 41 | 962 | $6.77 | $6,517.18 |
Investor takeaway
You need not stick to the same stock if its dividend fundamentals have changed. The perfect metric to look for in a dividend stock is its payout ratio (dividend as a percentage of free cash flow). If it is above 90%, it’s a high-risk stock. Such high payout ratios are difficult to sustain as the company needs money to reinvest in the business, pay debt, and have sufficient working capital. While free cash flow is what is left after paying all this, the company needs financial flexibility, and a higher ratio removes that flexibility.
You should review your portfolio periodically, matching stocks’ fundamentals with your assumptions. If the payout ratio nears 90%, gradually switch investments to safer stocks.
