Generating $600 a month in tax-free income from a Tax-Free Savings Account (TFSA) would be a great way to supplement retirement income or cover everyday expenses. But how much capital would it take, and is pursuing such a high monthly income really the best TFSA strategy?
If I wanted a simple and diversified approach, I’d start by considering the iShares S&P/TSX Composite High Dividend Index ETF (TSX: XEI).
XEI provides exposure to established Canadian dividend-paying companies, with significant allocations to financials (30.7%), energy (28.6%), and utilities (14.7%). Its largest holdings include Canada’s Big Four banks and major energy companies, many of which have long histories of dividend payments. Individual holdings generally represent less than 5% of the portfolio, helping reduce company-specific risk.
The ETF recently offered a distribution yield of 3.3%, paid monthly, with a relatively low management expense ratio (MER) of 0.22%. For investors seeking convenient exposure to Canadian dividend stocks without having to research and manage individual companies, XEI is an appealing starting point.
However, generating $600 monthly at a 3.3% yield would require approximately $217,523 in invested capital, assuming the distribution rate remains unchanged.
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Could a higher-yield ETF close the gap?
One alternative is the iShares S&P/TSX Capped REIT Index ETF (TSX: XRE). With a distribution yield of about 4.4%, it could generate the same $600 monthly income with roughly $162,896 invested.
XRE offers diversified exposure to Canadian real estate investment trusts (REITs), including retail, residential, and industrial properties. Its portfolio is concentrated in retail REITs (53.4%), followed by multi-family residential (19.7%) and industrial REITs (19.4%). However, investors pay a higher MER of 0.60%.
The higher yield is more attractive, but it comes with additional risks. REITs are capital-intensive businesses that frequently depend on borrowing to acquire properties. Rising interest rates can increase refinancing costs, putting pressure on funds from operations (FFO), profitability, and ultimately distributions.
REITs are required to distribute most of their taxable income to maintain their tax-efficient trust structure, leaving less internally generated cash available for reinvestment. This limits REITs’ financial flexibility and can make them vulnerable when borrowing costs rise, vacancies increase, or rental income weakens.
By comparison, established dividend-payers, including banks and telecom companies, generally have greater flexibility to retain earnings and reduce capital expenditures. That said, they can also reduce dividends when necessary, so their dividends are not risk-free either. Companies are only obligated to pay out dividends they have declared.
Why I wouldn’t chase $600 in monthly income
Here’s the bigger problem: Canada’s cumulative TFSA contribution limit reached $109,000 this year for someone eligible since the account’s introduction in 2009. Therefore, neither ETF can realistically generate $600 monthly within a typical maximum-contribution TFSA at these yields.
Even investing the entire $109,000 in XEI at 3.3% would generate roughly $3,608 annually, or nearly $301 monthly. XRE at 4.4% would produce about $4,818 annually, or $401 monthly.
And I wouldn’t necessarily recommend putting an entire TFSA into either ETF just to maximize distributions. Concentrating exclusively on income can sacrifice diversification and long-term capital appreciation.
Foolish takeaway
My preferred TFSA strategy would focus on sustainable total returns rather than an arbitrary monthly income target. I’d consider combining diversified ETFs with carefully selected individual dividend stocks, recognizing that many Canadian dividend payers distribute quarterly rather than monthly. Stocks such as BCE and Freehold Royalties could merit research, although their higher yields also warrant careful scrutiny.
Ultimately, $600 in monthly tax-free income is a worthwhile long-term goal, but building a diversified portfolio steadily, one stock at a time, that can grow and generate reliable income and appreciate over time is a smarter way to pursue it.
