How to Use Your TFSA to Earn $6,000 Per Year in Passive Income

Hint: You’ll need this Hamilton covered call ETF, which yields over 10%.

Tony Dong, MSc, CETF®

Tony started investing during the 2017 marijuana stock bubble. After incurring some hilarious losses on various poor stock picks, he now adheres to Bogleheads-style passive investing strategies using index ETFs. Tony graduated in 2023 from Columbia University with a Master's degree in risk management. He holds the Certified ETF Advisor (CETF®) designation from The ETF Institute. Tony's work has also appeared in U.S. News & World Report, USA Today, NYSE ETF Central, NASDAQ Fundinsight, Cboe ETF Market, TheStreet, and Benzinga. He is the founder of ETF Portfolio Blueprint (https://etfportfolioblueprint.com)

Published June 21, 2024 9:30 am EDT

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Despite its name, the Tax-Free Savings Account (TFSA) isn’t just for savings.

It’s a versatile investment account where all forms of income—including dividends and capital gains—accumulate tax-free and can be withdrawn without any tax implications.

While many use their TFSA to compound investments for long-term growth, it’s also an excellent tool for generating tax-free passive income.

Here’s a strategy to potentially earn $6,000 a year, or $500 a month, using your TFSA by investing in the Hamilton Enhanced Multi-Sector Covered Call ETF (TSX:HDIV).

The TFSA is a powerful savings vehicle for Canadians who are saving for retirement. — Source: Getty Images

What is HDIV?

At its core, HDIV holds a diversified portfolio consisting of eight other Hamilton exchange-traded funds (ETFs). Each of these ETFs utilizes a covered-call strategy and is allocated to mirror the overall sector composition of the S&P/TSX 60.

The ETFs in HDIV sell rights (called call options) to other investors to buy stocks within the ETF at a set price before a certain date.

When they sells these rights, it earns money immediately from the fees (premiums) paid by the buyers of these options.

However, this strategy limits how much profit HDIV can make if the stock prices rise significantly, as it has already agreed to sell the stocks at a lower price.

To put it simply, covered call ETFs like HDIV trade their future upside potential in exchange for higher than average present income.

To try to increase its earnings further, HDIV also uses a tactic called leverage—this means the ETF borrows money, amounting to up to 25% of its total value, and invests that money into more of its underlying ETFs.

While this can lead to higher returns if the market does well, it also makes the ETF riskier. If the market goes down, the losses can be amplified.

Overall, this is an ETF best suited for someone prioritizing monthly income over share price appreciation. As of June 6th, HDIV offers a 10.66% yield.

How much do you need to invest?

Assuming HDIV’s most recent May monthly distribution of $0.171 and the current share price at the time of writing of $16.54 remained consistent moving forward, an investor using a TFSA would need to buy roughly $48,346 worth of HDIV, corresponding to 2,923 shares to receive around $500 monthly tax-free.