How to Turn Your TFSA Into $1,000 a Month in Tax-Free Income

How does an extra $1,000 a month in tax-free income sound? It could cover groceries, help with household costs, or even give the retirement budget some much-needed breathing room.

That’s part of the appeal of the Tax-Free Savings Account (TFSA). The TFSA allows for invested contributions and dividends to compound tax-free. This makes it a powerful wealth-building tool for investors.

The real question is what are the investments, and how much is needed to build out a $1,000 per month tax-free income stream?

There’s no shortage of great investments on the market, and here are three options for investors to consider today.

Enbridge provides a higher income foundation

Enbridge (TSX: ENB) is a name that should be familiar to most Canadian income investors. The company operates an extensive energy infrastructure business that includes pipelines, renewable energy facilities and natural gas utilities.

Those operations provide services that customers rely on every day. This gives the company some defensive appeal. It also benefits from regulated earnings or long-term contracts that help support the business and its dividend.

For investors building a tax-free income portfolio, Enbridge’s reliable business model is a big part of the appeal. The company has paid out dividends for decades and has provided annual upticks for 31 consecutive years without fail.

As of the time of writing, Enbridge offers a 5.8% yield, making it one of the higher-paying options on the market.

Scotiabank adds a different source of dividends

It would be hard to compile a list of investments to generate tax-free income and not mention one of the big bank stocks. Today, that bank to consider is Bank of Nova Scotia (TSX: BNS).

Scotiabank earns money through lending, deposits, wealth management and other financial services. The bank is also known for being the most international of Canada’s banks, with operations in over a dozen markets around the world.

That gives the bank access to higher-growth markets and offers some diversification appeal outside of North America.

In terms of income, Scotiabank has paid dividends without fail for nearly two centuries. That’s an incredible amount of time, spanning both boom and bust periods.

As of the time of writing, Scotiabank offers a quarterly payment with a yield of 3.6%.

ZWC adds monthly distributions

Rounding out the top three investments for a tax-free income stream is an ETF. Specifically, the BMO Canadian High Dividend Covered Call ETF (TSX: ZWC).

ZWC holds a portfolio of Canadian dividend-paying stocks and writes covered call options to collect additional premiums. That strategy helps support the fund’s monthly distributions, but it does come with a trade-off.

Selling calls can limit participation in market gains, while the fund remains exposed to falling stock prices.

As of the time of writing, ZWC offers a 6.1% yield.

Bringing your tax-free income plan together

Each of the three investments mentioned above brings something different. Reliable banking, exposure to energy and a Canadian dividend-focused covered call fund.

The three investments together provide a blended yield of 5.1%.

Given an $80,000 investment in each, here’s how the portfolio can hit that $1,000 per month milestone:

Note that investors not ready to draw on that income or still building that portfolio can choose to reinvest those payments until needed. This allows the portfolio to continue compounding.

Regular contributions can help build those positions over time, while reinvested dividends purchase additional shares that generate income of their own.