How to Use Your TFSA to Earn $3,600 Per Year in Passive Income

This Canadian dividend ETF pays monthly and is an excellent way to program your TFSA for passive income.

Tony Dong, MSc, CETF®

Tony turned a series of 2017 marijuana stock losses into a freelance career advocating for ETF investing. He currently holds a Master’s in Risk Management from Columbia University and is a Certified ETF Advisor (CETF®). Tony is the founder of ETF Portfolio Blueprint (etfportfolioblueprint.com) and the Lead ETF Analyst for ETF Central, a partnership between Trackinsight and the NYSE. His analysis has also been featured in publications like Kiplinger, 24/7 Wall St., U.S. News & World Report, TheStreet, and Benzinga. Tony also provides independent content and marketing consulting services to various Canadian and U.S. ETF issuers. His editorial opinions for The Motley Fool remain independent and objective.

Published September 27, 2024 9:15 pm EDT

Imagine transforming your Tax-Free Savings Account (TFSA) into a powerhouse that cranks out passive income month after month.

Yes, the TFSA isn’t just for stashing cash; it’s a dynamic tool that can grow your wealth through investments, and best of all, the gains are tax-free.

Whether it’s covering your monthly phone bill, paying down your car insurance, or just accumulating savings for a rainy day, the income you can generate from a well-structured TFSA can make a tangible difference in your financial life.

Let’s explore how you can start turning your TFSA into a passive-income-generating machine — targeting $4,600 a year, or $300 per month.

Piggy bank with word TFSA for tax-free savings accounts. — Source: Getty Images

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Buy the right ETF

It’s not just individual stocks that can generate income—there are many types of assets that can pay you regularly. That’s why I like BMO Monthly Income ETF (TSX:ZMI).

It’s a fund of funds, meaning it holds numerous other BMO ETFs that give you access to the following income-generating assets:

Corporate bonds: Essentially loans to companies that pay you interest regularly and your principal back at maturity.
U.S., Canadian, and international dividend stocks: Stocks that consistently pay out a portion of their earnings.
Preferred shares: Similar to bonds, preferred shares offer fixed dividend payments but come with limited upside potential like stocks.
Covered calls and cash-secured puts: Options strategies designed to generate income, with covered calls earning you premiums from selling the right to buy shares you own at a specified price within a certain period. Cash-secured puts involve selling put options with enough cash set aside to purchase the stock if the option is exercised, earning income from the premiums received for selling the puts.

I like ZMI because it’s essentially a complete income portfolio in a single ticker. Currently, it’s paying a solid 4.91% distribution yield, with a very reasonable 0.2% expense ratio.

How much do you need to invest?

Assuming ZMI’s most recent September 4th monthly distribution of $0.07 and a share price of $17.19 as of September 12, remained consistent moving forward, an investor using a TFSA would need to buy roughly $73,676.34 worth of ZMI, corresponding to 4,286 shares to receive around $300 monthly tax-free.