I don’t know who needs to hear this, but income isn’t free money. Whether it’s a dividend from a stock or a distribution from an exchange-traded fund (ETF), the math is the same.

On the ex-dividend or distribution date, the price of that stock or the net asset value of that ETF drops by the exact amount paid out, all else being equal. It doesn’t matter if it recovers later in the day. It’s just an accounting mechanic.

That’s important to understand because there’s a lot of interest in using a Tax-Free Savings Account (TFSA) for passive income. And that’s fine. It’s certainly better than leaving cash sitting idle and losing purchasing power to inflation.

But if you’re still years, or even decades, away from needing that income, chasing yield may not be the best move. If you’re willing to delay gratification, your TFSA can be much more powerful as a compounding machine.

Loading up on double-digit yield stocks or funds often means taking on more risk or sacrificing long-term growth. Instead, the focus should be on two things: low fees and broad diversification.

Why low fees and global diversification matter

When you invest, there are forces working for you and against you. Markets, over time, tend to grow. That’s the tailwind. But fees, poor diversification, and bad timing decisions can all drag your returns down.

Many investors end up underperforming not because markets fail, but because they get in their own way. The simplest solution is to aim for the market’s average return while removing as many obstacles as possible.

Diversification is a big part of that. The global stock market includes thousands of companies, yet only a small percentage of those stocks drive most of the long-term gains. If you’re holding just a handful of names, the odds of consistently picking those winners are low.

That’s why John Bogle, the founder of Vanguard, popularized the idea of “buying the haystack.” Instead of trying to find the needle, you own every stock from different sectors, sizes, and countries.

The second piece is cost. Fees come directly out of your returns, and they compound over time just like gains do, except in the wrong direction. Paying high fees for a concentrated portfolio makes little sense when you can own a broadly diversified one at a fraction.

The ETF that puts this into practice

One ETF that captures this approach is the iShares Core MSCI All Country World ex Canada Index ETF (TSX:XAW).

It holds more than 8,200 stocks from around the world, giving you exposure to the United States, developed international markets like Japan, the United Kingdom, and Germany, as well as emerging markets such as China, India, and Brazil.

Importantly, it excludes Canada. That’s actually a feature. Many Canadian investors already have a home bias through individual stocks or other holdings. Using this ETF as the foundation of your portfolio helps you diversify globally without doubling up on Canadian exposure. Even if your Canadian picks underperform, the rest of your portfolio is still tied to the broader global market.

It’s also cost-efficient. With a 0.22% management expense ratio, you’re getting access to thousands of stocks across multiple regions at a relatively low cost. The ETF handles rebalancing and underlying exposure for you, making it a hands-off solution.

The post TFSA Investors: Don’t Chase Yield — Do This Instead appeared first on The Motley Fool Canada.

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• The 1 Strategic Canadian ETF Every TFSA Should Have

Fool contributor Tony Dong has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

At any given time, you’re going to be bombarded with financial news. Most of it is noise. One topic that always grabs attention is interest rates. Central banks sit at the center of that conversation. In the U.S., it’s the Federal Reserve. In Canada, it’s the Bank of Canada. Elsewhere, you’re looking at institutions like the Bank of England or the Swiss National Bank.

Most central banks are trying to balance two goals. They want to support employment while keeping inflation under control. Not flat, but growing at a stable and manageable pace.

They do this by setting policy interest rates. Think of this as the baseline cost of borrowing. When inflation runs too hot, they raise rates to cool things down. When the economy slows and unemployment rises, they cut rates to stimulate growth.

The problem is when both forces show up at once. Rising inflation alongside weakening economic conditions creates a difficult environment. That’s where concerns around stagflation come in.

Right now, central banks are largely in a holding pattern. One reason is geopolitical risk. The ongoing U.S.-Israel-Iran conflict has raised concerns about disruptions to global oil shipping. Roughly a fifth of the world’s energy supply flows through critical routes like the Strait of Hormuz. Any disruption can push energy prices higher, feeding directly into inflation.

So where does that leave you as a Canadian investor, especially inside your Tax-Free Savings Account (TFSA)? Here’s my take.

The smartest move: Do nothing

The best move might not feel like a move at all. Do nothing. Stay the course.

Interest rates go up and down. They always have. Go back to the early 1980s, when Paul Volcker pushed U.S. rates above 20% to fight inflation. Since then, we’ve seen decades where real rates, after accounting for inflation, were effectively negative.

These shifts feel dramatic in the moment, but they’re part of the background.

If you’re a long-term investor, constantly reacting to rate decisions usually does more harm than good. Trying to time interest rates means trying to predict macroeconomic policy, geopolitics, and market reactions all at once. That’s not a game most retail investors win.

What actually works is much simpler. Stay diversified. Keep costs low. Reinvest your dividends. Let compounding do its job. Inside a TFSA, where gains and income aren’t taxed, that approach becomes even more powerful.

How to put “do nothing” into practice

If you’re going to embrace a hands-off approach, you need investments that can run in the background without constant monitoring. One example is the Vanguard FTSE Canada All Cap Index ETF (TSX:VCN).

This ETF gives you exposure to the entire Canadian stock market in a single purchase. That includes large, mid, and small-cap companies, with over 200 holdings across all sectors. The portfolio itself is reasonably valued, trading at a price-to-earnings ratio of about 20 times. It also maintains solid quality metrics, including an average return on equity of 11.3% and earnings growth around 12.8%.

It’s very low cost. With a 0.06% expense ratio, you’re paying about $6 annually for every $10,000 invested. That’s minimal drag on your returns. You’re also getting income along the way. The ETF currently offers a 12-month trailing yield of 2.1%, paid quarterly. Inside a TFSA, those distributions are yours to keep, with no tax reporting or deductions.

VCN isn’t flashy. It doesn’t try to predict where rates are going. It simply gives you broad exposure to the Canadian market and lets compounding do the work over time. I think this is the best way to invest for most people.

The post Interest Rates Aren’t Falling: Here’s What I’d Do With My TFSA appeared first on The Motley Fool Canada.

More reading

• 3 Canadian ETFs Worth Buying and Holding in Your TFSA Right Now
• Want Decades of Passive Income? Buy This ETF and Hold It Forever

Fool contributor Tony Dong has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

If you’re looking for dependable income, the first thing you should look at is the payout ratio. The payout ratio measures how much of a company’s earnings are being paid out as dividends.

What’s considered “safe” can vary by industry, but as a general rule, a payout ratio between 40% and 70% is often viewed as sustainable for most companies. Go too low, and you’re not getting much income. Go too high, and there may not be enough of a cushion if earnings decline.

Things get a bit more complicated when you move from stocks to funds. Funds pay distributions, not dividends, and those distributions can come from multiple sources.

Some of it may be dividends from the underlying holdings, but it can also include interest income, capital gains, or even return of capital. That means the yield you see isn’t always a direct reflection of what the portfolio is earning.

That’s where managed distribution policies come in. Some funds set a target payout in advance and distribute a fixed amount on a regular schedule, usually monthly. Behind the scenes, the fund manager uses a mix of income, gains, and other sources to meet that target. This approach can make income planning much simpler, especially for investors who rely on consistent cash flow.

One example is Canoe EIT Income Fund (TSX:EIT.UN). As of April 14, it offers an annualized yield of about 7.1% based on its most recent monthly distribution. Here’s what you need to know before investing.

What is EIT.UN?

EIT.UN is a closed-end fund, which means it has a fixed pool of capital. Unlike exchange-traded funds, new units aren’t constantly created or redeemed. Because of that, the fund can trade at either a premium or a discount to its net asset value. As of April 13, the fund closed at $16.89, while its net asset value stood at $17.09. That means it’s currently trading at a slight discount.

The portfolio itself is actively managed and relatively concentrated, holding just 56 stocks. Roughly half are Canadian, and the other half are U.S. companies. The focus is on quality businesses with growth potential, rather than simply chasing the highest yields.

Another key difference is the use of leverage. EIT.UN can borrow up to 20% of its portfolio, effectively increasing exposure to its holdings. This can enhance returns in strong markets, but it also increases downside risk during weaker periods.

Despite that, the long-term track record has been solid. Over the past 10 years, the fund has delivered a 13.71% annualized total return, assuming distributions are reinvested before taxes. That’s after accounting for a relatively high 1.1% management fee.

EIT.UN’s distributions

The defining feature of EIT.UN is its fixed monthly distribution of $0.10 per unit. It has paid this amount consistently, month after month, making it a popular option for income-focused investors. On an annualized basis, that translates into the roughly 7.1% yield seen today.

For the April 2026 distribution, the ex-dividend date is April 22. That’s the date you must own the fund by to be eligible for the upcoming payment. The payout itself will be made on May 15, 2026.

This schedule tends to follow a predictable pattern, simply rolling forward each month. That consistency makes it easier to plan around if you’re relying on the income.

That said, the composition of those distributions can vary. Because the fund draws from multiple sources, including dividends, capital gains, and return of capital, the tax treatment in a non-registered account can be more complex.

This is one reason why EIT.UN is often better suited for a Tax-Free Savings Account, where distributions are not taxed, and record-keeping is much simpler.

The post A TFSA Pick Yielding 7% With Dependable Cash Payments appeared first on The Motley Fool Canada.

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Fool contributor Tony Dong has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

I’ve said it before and I’ll say it again: total return is all that matters. What you actually keep is the result of price appreciation plus reinvested distributions, after fees and taxes.

That’s why you should be cautious around income ETFs promising double-digit yields. In many cases, they’re either taking on significantly more risk or simply returning your own money back to you through something called return of capital.

This is why I prefer something simpler and more grounded, like the Vanguard FTSE Canadian High Dividend Yield Index ETF (TSX:VDY).

At first glance, it might not look exciting. As of March 31, 2026, it offers a 12-month trailing yield of 3.5%, which doesn’t exactly jump off the page. But again, yield alone doesn’t tell the full story. Total return does. And on that front, this ETF has delivered.

What is VDY?

VDY is a passive ETF that tracks a portfolio of just over 56 Canadian dividend-paying stocks selected for above-average yield. The methodology leans toward companies that not only pay dividends but also trade at reasonable valuations and maintain solid profitability.

On average, the portfolio trades at a price-to-earnings ratio of 15.3 times and a price-to-book ratio of 2.2 times. At the same time, it maintains quality metrics like a 12.8% return on equity and a 6.6% earnings growth rate. That combination of income, value, and profitability is what helps drive long-term results.

Sector-wise, there’s no surprise here. Financials make up over half the portfolio, followed by energy at just over a quarter. That’s simply the reality of the Canadian market. If you want high-yield Canadian stocks, you’re going to get a lot of banks and energy companies. VDY leans into that rather than trying to fight it.

What the numbers say

With a 3.5% yield reinvested before taxes, VDY has delivered a 10-year annualized return of 13.7%. That’s strong on its own, but even more impressive when you compare it to a broad benchmark.

An ETF tracking the S&P/TSX 60 Index over the same period would have returned about 12.5% annualized with dividends reinvested. That difference may not seem huge at first glance, but over time, that gap compounds. That’s what investors refer to as alpha, outperforming the broader market.

It also challenges a common assumption. Dividend ETFs are often seen as slower-growth, income-first investments. But that doesn’t mean they can’t outperform. With the right construction and low costs, they absolutely can. Speaking of costs, VDY charges just 0.22% annually. That’s low enough to avoid eating into returns, especially over long holding periods.

Another point worth highlighting is the distribution profile. VDY pays monthly, which is appealing if you’re looking for regular cash flow. Outside of a Tax-Free Savings Account (TFSA), those distributions are also relatively tax efficient.

A large portion comes from eligible Canadian dividends, which are taxed at a lower rate, with the remainder mostly made up of capital gains and some return of capital. There’s very little exposure to foreign income or fully taxable interest.

Final thoughts

VDY isn’t going to wow you with a double-digit yield. But it doesn’t need to. What it offers instead is a balanced approach: solid income, reasonable valuations, strong underlying businesses, and a track record of delivering competitive total returns.

If your goal is to build long-term wealth while still collecting monthly income, I think this is the kind of ETF that deserves a closer look.

The post A 3.5% Yielding Monthly Income ETF Every Canadian Should Review appeared first on The Motley Fool Canada.

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Fool contributor Tony Dong has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Comparison might be the thief of joy, but today, we’re going to use it anyway. According to data from the Canada Revenue Agency (CRA), specifically Table 3A from its annual Tax-Free Savings Account (TFSA) statistics, the numbers may surprise you.

The latest release, covering the 2023 contribution year, breaks down TFSA balances by age group. For Canadians aged 50 to 54, the average fair market value sits at just $30,190.

That’s lower than many people might expect. On its own, it’s not enough to fund a retirement. But to be fair, a TFSA is just one piece of the puzzle. By this stage in life, you may also have home equity, a workplace pension plan, and savings in a Registered Retirement Savings Plan (RRSP).

Still, if you’re sitting on roughly $30,000 in your TFSA with about 10 to 15 years until retirement, the question becomes: how should you invest it?

The ideal asset allocation for 50-year-olds

Asset allocation simply refers to how you divide your portfolio between different types of investments. The two biggest factors that influence it are your time horizon and your risk tolerance.

If you’re around 50 and planning to retire at 65, you still have about 15 years to grow your money. That’s long enough to benefit from compounding, so being overly conservative could mean leaving gains on the table. At the same time, this isn’t the stage to take excessive risks with concentrated stock picks.

A balanced approach tends to make the most sense. That means splitting your portfolio between growth assets and more defensive ones that don’t always move in the same direction. Growth typically comes from stocks, while stability comes from bonds.

Diversification matters within both categories. For stocks, that means owning companies across all 11 sectors and across regions, including Canada, the United States, and international markets. Developed markets like Europe and Japan, as well as emerging markets like China and India, all play a role.

The same idea applies to bonds. Holding a mix of government and corporate bonds across different maturities can help reduce volatility.

And throughout all of this, fees matter. The less you pay in fees, the more of your returns you keep.

The ideal ETF for a 50-year-old TFSA

One exchange-traded fund (ETF) that puts all of this into practice is Vanguard Growth ETF Portfolio (TSX:VGRO).

This ETF maintains an 80/20 split between stocks and bonds, giving you a strong tilt toward growth while still providing some downside protection. It’s globally diversified across sectors and regions, and it achieves this by holding a basket of underlying low-cost index ETFs.

In other words, it handles the heavy lifting for you. You don’t need to build and rebalance a portfolio yourself. You simply buy the ETF and reinvest the distributions, which currently yield about 1.87% on a 12-month basis.

Costs are another advantage. VGRO previously had a management fee of 0.22%, translating to a 0.24% management expense ratio (MER). As of November 18, 2025, Vanguard reduced the management fee to 0.17%. While the updated MER hasn’t been finalized yet, it’s expected to land in the range of 0.19% to 0.20%, which is very competitive for a globally diversified, all-in-one solution.

Final thoughts

If the average TFSA balance at age 50 is around $30,000, the focus shouldn’t be on comparing yourself to others. It should be on making the most of what you have.

With a decade or more still ahead, there’s time to grow your investments. The key is to strike a balance between growth and stability, stay diversified, and keep costs low.

You don’t need to overcomplicate things. A well-constructed and low-cost all-in-one ETF can do most of the work for you.

The post How Much Does a Typical Canadian Have in Their TFSA at 50? appeared first on The Motley Fool Canada.

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Fool contributor Tony Dong has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Fun fact. Did you know that U.S.-listed exchange-traded funds (ETFs) are subject to a 15% foreign withholding tax on dividends before the cash even reaches you?

That applies even inside a Tax-Free Savings Account (TFSA). And unlike a non-registered account, there is no foreign tax credit to recover any of that.

Now, the impact depends on what you own. If you are holding a broad market ETF or a growth-focused strategy, the dividend yield is usually low, so the drag is minimal. In those cases, it still makes sense to hold U.S. equities in a TFSA.

But if you are chasing higher income, that withholding tax becomes much more noticeable. It eats into your yield and reduces your total return. That is why there is a strong case for keeping at least some Canadian equity exposure in a TFSA.

Here are three Canadian ETFs worth considering, each serving a different role. One for broad market exposure, one for large-cap blue chips, and one for income.

Buy the broad Canadian market

The Vanguard FTSE Canada All Cap Index ETF (TSX: VCN) is about as simple and diversified as it gets.

For a 0.06% management expense ratio, you get exposure to over 200 Canadian stocks across large, mid, and small caps. It is a full representation of the domestic equity market.

If your goal is to own the Canadian economy and not think too much about it, this ETF does exactly that.

The current 12-month trailing yield is around 2.1%, with distributions paid quarterly.

Blue chip Canadian stocks

If you want to focus more on the most established companies, BMO S&P/TSX 60 Index ETF (TSX: ZIU) is a solid alternative.

Unlike VCN, which includes smaller companies, this ETF holds the 60 largest names in the Canadian market.

That makes it more concentrated, with even heavier exposure to financials and energy. It is a bit more top-heavy, but you are getting the biggest and most dominant players.

The management expense ratio is slightly higher at 0.14%. In return, you get a modestly higher yield, currently around 2.2% on a forward-looking basis.

Canadian dividend stocks

If your focus is income, the iShares S&P/TSX Composite High Dividend Index ETF (TSX: XEI) is worth a look.

This ETF holds about 75 Canadian dividend-paying companies and offers the highest yield of the three. Right now, the 12-month trailing yield sits around 3.9%, and distributions are paid monthly.

The trade-off is cost. With a 0.22% management expense ratio, it is still reasonable, but noticeably higher than a broad-market ETF like VCN. You are paying a bit more for that higher income stream.

The post 3 Canadian ETFs Worth Buying and Holding in Your TFSA Right Now appeared first on The Motley Fool Canada.

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Fool contributor Tony Dong has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

There are a lot of monthly income exchange-traded funds (ETFs) in Canada right now. Some even go a step further and pay semi-monthly, meaning you get paid twice every 30 to 31 days. On the surface, that sounds great.

The trade-off is how those payouts are generated. Many of these newer income ETFs rely on financial engineering to boost yields into the double digits. That often includes leverage, covered call strategies, or more complex structures.

Those can work in certain environments, but they can also come with higher fees, capped upside, and more volatility when markets turn. If you want to keep things simple, there is a strong case for sticking with a low-cost, plain vanilla dividend ETF.

Here is one dividend ETF from iShares that pays monthly and, when held inside a Tax-Free Savings Account (TFSA), delivers income that is completely tax-free.

What is XDIV?

The iShares Core MSCI Canadian Quality Dividend Index ETF (TSX: XDIV) is a passive rules-based dividend ETF that tracks the MSCI Canada High Dividend Yield 10% Security Cap Index, net of expenses.

The index applies a set of screens to select Canadian dividend-paying companies with strong financials, solid balance sheets, and more stable earnings. It also limits any single holding to a maximum weight of 10%, which helps prevent overconcentration in one name.

The result is a relatively focused portfolio of just 21 holdings. That is much narrower than a broad-market ETF, but that is by design. The fund is intentionally concentrated in higher-quality dividend payers.

Like most Canadian equity strategies, financials dominate the portfolio at 44.9%, followed by energy at 29.5%. Utilities come next at 12.2%, and consumer discretionary rounds out the top sectors at 11.4%.

Yield and expenses

There are two main ways to look at yield for XDIV. The first is the trailing 12-month yield. This looks at what the ETF actually paid out over the past year and compares it to the current price. Right now, that comes in at about 3.6%.

The second is the distribution yield. This takes the most recent monthly payout, annualizes it, and compares it to the current price. That figure is slightly higher at 3.6%, but keep in mind it is a projection.

In practice, both are useful. The trailing yield tells you what investors actually received, while the distribution yield gives you a forward-looking estimate. Averaging the two is a reasonable way to get a quick sense of expected income.

Just keep in mind that the payout is not fixed. Like most dividend ETFs, the monthly distribution can change over time depending on what the underlying companies pay.

Inside a TFSA, though, the tax treatment becomes irrelevant. You do not need to worry about whether the income is classified as eligible dividends, capital gains, return of capital, or anything else. The full amount is yours to either reinvest or withdraw.

On fees, this ETF stands out. With a 0.11% management expense ratio, XDIV is one of the lowest-cost dividend ETFs in Canada. On a $10,000 investment, that is about $11 per year in fees, which keeps more of the income in your pocket.

The post Power Up Your TFSA: This TSX-Listed ETF Delivers Tax-Free Monthly Cash Flow appeared first on The Motley Fool Canada.

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Fool contributor Tony Dong has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Uncle Ben told Spider-Man that with great power comes great responsibility. That idea applies pretty well to the Tax-Free Savings Account (TFSA).

You get a powerful benefit. No taxes on capital gains, dividends, or interest income. But in exchange, you have to follow strict rules around contributions and withdrawals.

What many investors do not realize is that there is another layer of complexity once you start investing globally.

Certain foreign investments inside a TFSA can come with fine print. In some cases, that means losing a portion of your income to taxes you cannot recover. In others, it means the investment is not even allowed in the account at all.

If you are building a globally diversified TFSA, these are rules worth understanding before you allocate capital.

The 15% foreign withholding tax

One of the most overlooked rules is the 15% foreign withholding tax on U.S. dividends. This applies to U.S.-listed stocks and ETFs. It also applies indirectly to Canadian-listed ETFs that hold U.S. stocks.

The key detail is that this tax is withheld at the source. You never see it. It is deducted before the dividend reaches your account. And inside a TFSA, there is no way to recover it.

That is different from a non-registered account, where you can claim a foreign tax credit, or a Registered Retirement Savings Plan (RRSP), where U.S. dividends are generally exempt due to a tax treaty.

So can you avoid it? Yes, but it depends on your strategy. If you are holding growth-oriented stocks or ETFs with low dividend yields, the impact is usually small and often not worth worrying about.

But if you are targeting high-yield U.S. investments, that 15% drag becomes much more noticeable. In those cases, it may make more sense to hold them in an RRSP where a tax treaty eliminates the impact.

International stocks and eligibility rules

Accessing international stocks as a Canadian investor is easier than ever, but not all methods are TFSA-friendly. One popular option is Canadian Depositary Receipts (CDRs).

These trade on Canadian exchanges, are priced in Canadian dollars, and represent ownership in foreign companies. They also include built-in currency hedging, though there is a small embedded fee for that feature.

You can also buy some foreign stocks directly through your brokerage. The issue is that many of these trade over-the-counter, or OTC, instead of on a recognized exchange like the NYSE, NASDAQ, or TSX.

Even if they are large, well-known companies in their home markets, OTC-listed securities are not considered qualified investments for a TFSA. That means you cannot hold them in the account. These securities can still be held in a non-registered account though.

The post The TFSA Rules Around Global Investments That Many Canadians Don’t Know About appeared first on The Motley Fool Canada.

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Fool contributor Tony Dong has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

I see a lot of investors, especially younger ones just getting started, going all in on a 100% equity portfolio. They own stocks across different countries and all 11 sectors and assume that means they are fully diversified. In a sense, they are, but only within one asset class.

True diversification goes beyond that. There is real value in holding assets that behave differently from stocks. When equities fall, other assets may hold up better.

That gives you the ability to rebalance, buying stocks when they are down and trimming what has held up. Over time, that process can improve returns and reduce risk. Diversification is often called the only free lunch in investing for a reason.

The question then becomes what to pair with stocks. Some investors turn to gold or even Bitcoin. Those have their place, but there is also a strong case for going back to basics and looking at bonds again, with a bit more selectivity.

In particular, government bonds issued by the Canadian federal and provincial governments are starting to look worth a second look.

Why government bonds?

Bonds serve a few important roles in a portfolio. They provide a steady stream of income, tend to be less volatile than stocks, and often hold up better during equity market downturns. That makes them useful as a stabilizer.

That said, not all bonds are the same. Broadly speaking, you can split the market into government bonds and corporate bonds.

Corporate bonds are essentially loans to companies. Because companies can run into financial trouble, these bonds carry credit risk. Most are rated investment grade, typically ranging from BBB to A, with a smaller number reaching AA or AAA. As you move down the credit spectrum, yields increase, but so does the risk that the issuer may not be able to meet its obligations.

Government bonds are different. Bonds issued by the Canadian federal and provincial governments are generally rated very highly, often AA or AAA. That makes them far less likely to default. You do give up some yield compared to corporate bonds, but you gain stability.

If the goal is to have something in your portfolio that can help cushion the blow during a market downturn, government bonds have historically done a better job of that than their corporate counterparts.

How to invest in government bonds

For most investors, especially those just starting out, buying individual bonds is not practical. Pricing is not always transparent, and you need to understand concepts like yield to maturity, duration, and how interest rate changes affect prices. It is easy to get it wrong.

A much simpler approach is to use somehting like the iShares Core Canadian Government Bond Index ETF (TSX: XGB). It tracks the FTSE Canada All Government Bond Index and provides exposure to a broad basket of government bonds.

The fund holds about 557 bonds, with roughly 57% in federal government bonds and about 40% in provincial bonds. From a credit perspective, the portfolio is high quality. Around 59% is rated AAA and about 36% is rated AA, which keeps default risk very low.

On the income side, the ETF currently offers a 3.1% trailing 12-month yield after fees. The management expense ratio is just 0.13%, which is reasonable for this type of exposure.

In terms of how to use it, it can act as a stabilizer in a portfolio that is otherwise heavily weighted toward stocks. If you are currently 100% in equities, you might consider shifting to something like 90% stocks and 10% government bonds.

There are also simple rules of thumb. One common guideline is to subtract your age from 100 to determine your stock allocation, with the remainder in bonds. So if you are 50 years old, that would suggest a 50/50 split between stocks and bonds.

The post Why Government Bonds Are Starting to Look Worth a Second Look appeared first on The Motley Fool Canada.

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Passive income planning can get messy fast in a non-registered account. It is not as simple as taking a fund’s stated yield, multiplying it by your portfolio value, and calling it a day. That yield can change, and more importantly, taxes complicate everything.

Different types of income are taxed differently. Eligible dividends, non-eligible dividends, capital gains, foreign income, and return of capital all have their own rules. Once you factor that in, your “expected income” number can look very different after tax.

Inside a Tax-Free Savings Account (TFSA), all of that becomes irrelevant. That simplicity makes it much easier to plan around a target income number. And if you are not strictly using your TFSA for long-term compounding, it can be a tool for generating passive income.

That said, fund selection still matters. The goal should be to keep fees low and maintain diversification. Strategies that rely on leverage or covered calls can boost yield, but they often come with higher costs, more risk, and weaker long-term returns.

With that in mind, here is one possible way to structure a TFSA to generate about $4,360 per year in tax-free income using exchange-traded funds (ETFs).

The ETF to use

The BMO Growth ETF (TSX: ZGRO) is an unorthodox starting point for a TFSA passive income investor.

It is an asset allocation ETF, meaning it holds a mix of underlying ETFs rather than individual stocks or bonds. The portfolio is roughly 80% global equities across Canada, the U.S., and international markets, and 20% global bonds.

That mix gives you growth potential along with some stability and income from the bond portion. The cost is also reasonable at a 0.18% expense ratio. The downside is yield.

On its own, ZGRO only yields about 1.4%, which is not particularly helpful if your goal is income. You could generate cash flow by selling units, but many investors are uncomfortable with that because it feels like drawing down principal.

That is where the target cash flow version comes in. ZGRO.T holds the exact same underlying portfolio as ZGRO, but it is structured to pay out a higher, more consistent monthly distribution.

BMO does this by combining the underlying dividends with realized capital gains and return of capital. The goal is to deliver a higher, more predictable cash flow, currently around a 5.4% yield.

How much do you need to invest?

Let’s break this down step by step. Your target is $4,360 per year in passive income.

First, convert that into a monthly number: $4,360 ÷ 12 = about $363.33 per month

ZGRO.T paid $0.058 per unit in March, and it was the same in January and February, so we will assume that level holds.

Now divide your monthly income target by the per-unit distribution: $363.33 ÷ $0.058 ≈ 6,264 units

Now multiply that by the current unit price: 6,264 × $12.98 ≈ $81,300

That means you would need roughly $81,300 invested to generate about $4,360 per year, or $363 per month, in tax-free income.

Just remember that ZGRO.T’s distribution payout is designed to be stable, but it is not guaranteed, and the underlying portfolio value will still fluctuate with the market.

The post How a TFSA Could Help You Earn $4,360 in Tax-Free Passive Income Each Year appeared first on The Motley Fool Canada.

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Fool contributor Tony Dong has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.