Building a monthly tax-free income stream is a long-term goal of many income investors. An additional $200 income stream can make a huge difference to a budget. It can help cover bills or provide some added breathing room.
For investors looking to build toward that goal, the TFSA is a great place to start. The account can hold investments whereby both contributions and distributions compound tax-free. That means investors can collect distributions inside the account and reinvest them, or withdraw the cash.
Even better, some of those investments pay out on a monthly schedule. Specifically, I’m thinking about the iShares S&P/TSX Composite High Dividend Index ETF (TSX: XEI) and BMO Equal Weight REITs Index ETF (TSX: ZRE) as great options to own.
Source: Getty Images
Start with Canadian dividend stocks through XEI
Building a portfolio of individual dividend stocks takes research. Investors need to choose companies, decide how much to allocate to each, and monitor those businesses over time.
That’s part of the appeal of investing in ETFs like XEI. XEI provides exposure to a basket of Canadian dividend stocks. The fund tracks the S&P/TSX Composite High Dividend Index and pays distributions monthly.
Part of that appeal is adding several holdings through a single ticker. For someone making regular TFSA contributions, that makes the process easier to maintain. It also eliminates the need to recheck and rebalance individual holdings.
As of the time of writing, XEI offers a distribution yield of 3.5%.
Add real estate income through ZRE
REITs offer another source of investment income. They provide exposure to properties and the rental income those properties generate.
Rather than picking individual REIT investments, ZRE provides a basket of Canadian REITs together in one ETF.
The fund follows an equal-weight approach, giving each REIT a similar allocation when the index is rebalanced. That reduces dependence on the largest holdings and spreads the investment across different property businesses.
For investors who want real estate exposure but don’t want to choose individual REITs or bother with owning a physical property, that’s an appealing feature.
ZRE also pays monthly distributions, which, as of the time of writing, works out to a yield of 4.7%.
How much would you need for $200 in monthly tax-free income?
Together, XEI and ZRE provide exposure to Canadian dividend stocks and REITs, producing a blended yield of 4.1%.
Given an initial investment of $30,000 into each fund, here’s how that monthly tax-free income stream would pan out:
| Fund | Recent Price | No of Shares | Distribution Yield | Annual Payout | Frequency |
| iShares S&P/TSX Composite High Dividend Index ETF (XEI) | $40.03 | 749 | 3.54% | $1,061.38 | Monthly |
| BMO Equal Weight REITs Index ETF (ZRE) | $22.30 | 1,345 | 4.66% | $1,397.70 | Monthly |
| Monthly: | $204.92 | Total: | $2,459.08 |
Investors don’t need the full $60,000 to get started. Regular contributions can help build the balance. Reinvesting distributions buys additional units, which can generate further income over time.
Once that income reaches that desired level, investors can choose to collect the cash instead. Even before reaching $200 a month, those smaller payments can provide a reason to keep building.
