TFSA Passive Income: Earn $500/Month

Do you want to earn $500 per month in passive TFSA income?

It will take some saving, and some luck, but you can get there eventually. The maximum amount of possible TFSA contribution room in 2024 is $95,000. If you invest that much money at a 6.35% yield, you can get $6,000 per year in passive income. That averages out to $500 per month.

Now, to literally collect $500 per month in passive income is trickier, because that requires you either invest in monthly pay dividend stocks or have a portfolio of stocks all with different payout schedules. The “diversified-portfolio-with-different-payout-schedules” method is probably the safer one, but if you’re interested in monthly pay dividend stocks, read on, because I will share one that seems reasonably sensible.

Method #1: The “aim-for-high-monthly-yield” method

I’m not generally the biggest fan of monthly pay dividend stocks. I feel like the monthly payout schedule is often a way for lacklustre companies to attract investors irrationally prioritizing high payout frequency (REITs are an exception to this). However, I have been able to identify one monthly pay TSX dividend stock that looks compelling.

First National Financial (TSX:FN). First National is a non-bank mortgage lender. It finances its mortgages with bonds rather than deposits, which is what makes it not a bank. Banks face liquidity risks stemming from their depositors’ ability to withdraw funds without any notice. FN does not face this risk, which I find compelling.

First National has a lot of things going for it, fundamentally speaking. It has a nine P/E ratio, which indicates cheapness. It has a 25% profit margin and a 41% return on equity. Its revenue and earnings have grown, both by around 11% per year over the last five years. The company is doing well. Declining interest rates could hurt its interest income a little, but with inflation still above target, rates probably won’t come down so much that they cancel out the effect of increased mortgage origination. So there’s potential for continued growth here.

First National stock has a 6.6% yield that is paid monthly. That means that a $95,000 TFSA fully invested in it generates $6,270 per year in dividend income, or a little more than $500 per month. That doesn’t mean you should invest your entire TFSA in nothing but FN stock, but it does go to show what kind of yield you should aim for if $500 per month is your goal.

Method #2: The safer, long-term approach

Another approach you could take to achieving $500 a month in your TFSA is to simply invest in a diversified portfolio of stocks, realize returns over time, and then invest your portfolio at a market average yield. The dividend yield on the TSX index right now is about 3.3%. If you invest defensively and make continued contributions over the years, you might find yourself with a big enough balance to get around $500 per month. This approach takes longer than the “high-yield-monthly-pay-dividend-stock” method, but it’s much safer.