This Simple Dividend ETF Could Turn $500 a Month Into a $77,000 TFSA

Here’s how investing $500 a month in a TFSA for 10 years could grow into a $77,000 dividend portfolio that pays $300 per month in dividends.

| More on:
Happy golf player walks the course

Source: Getty Images

Looking to build a substantial investment portfolio but think you need a large sum to start? Here’s some encouraging news: With just $500 in monthly contributions, Canadian investors can use top dividend exchange-traded funds (ETFs) to potentially grow a Tax-Free Savings Account (TFSA) portfolio to over $77,000 in 10 years while generating meaningful monthly dividend income streams. Let’s explore how this achievable investment strategy works.

The power of consistent investment

The key to building a decent TFSA account balance that generates dependable monthly passive income is starting early and remaining consistent. By investing $500 each month in your TFSA, you’ll be contributing $6,000 annually – well within the annual TFSA contribution limits. While this adds up to $60,000 in direct contributions over a decade, the power of compound returns could help grow your portfolio to more than $77,000, thanks to dividend reinvestment.

A simple one-fund solution: Dividend ETFs

Canadian dividend ETFs can make your investing journey easier. Rather than trying to personally pick individual stocks, consider buying the iShares S&P/TSX Composite High Dividend Index ETF (TSX:XEI). This established fund, managed by BlackRock – the world’s largest ETF provider – offers broad diversification across 76 Canadian dividend-paying stocks.

The ETF is designed to fit well into a long-term focused dividend-investment program. With a strong track record since its 2011 inception, investors have poured more than $1.7 billion of capital into the low-cost, moderate-risk ETF with a low management expense ratio (MER) of 0.22%. Management fees won’t eat into your capital.

Most noteworthy, the XEI ETF pays monthly distributions that yield an attractive 4.9% annually. Given a distribution reinvestment program (DRIP) in place, the ETF presents a compelling investment vehicle for efficient dollar-cost averaging. Dollar-cost averaging is an investment strategy that seeks to consistently invest a fixed amount of capital each period, for several investment periods, and has improved investors’ fortunes over time while also instilling financial discipline in them.

Built-in diversification

The XEI ETF provides comprehensive exposure to various sectors of the Canadian economy, with strategic allocations primarily spread across energy at 31%, financials at 29.6%, utilities at 14.13%, and communications comprising 9.55% of the portfolio. The dividend ETF’s top holdings include respected Canadian dividend stocks like Canadian Natural Resources, Suncor Energy, and TC Energy, each making up about 5% of the portfolio.

Watch your money grow

Your investment journey could unfold steadily over time, assuming constant share prices (at $28 per share), no fractional share purchases, and flat dividend rates at $0.109 each month. With a $500 investment each month, you’d start with 17 shares earning about $1.85 in dividends in your first month. You’d grow to own 35 total shares earning $3.82 in month two, as shown:

Projected growth of $500 monthly investments into the XEI ETF

MonthAmount to Invest This Month ($500 + Distribution From Previous Month)Number of Additional Shares to Purchase This MonthTotal Shares Owned After This Month’s PurchaseDistribution RateTotal Distribution (Rate X Total Shares Owned)Value of Investment at Month-End
1$5001717$0.109$1.85$501.85
2$501.851835$0.109$3.82$1,005.67
3$503.821853$0.109$5.78$1,511.45
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
118$791.58282,703$0.109$294.63$75,978.63
119$794.63282,731$0.109$298.99$76,766.99
120$798.99282,761$0.109$300.95$77,608.95
Source: Author computations

By the end of your ten-year journey, this simplistic model estimates you could own approximately 2,761 shares, potentially generating $300 in monthly dividends.

Important considerations

While this strategy shows promise, remember that stock markets fluctuate. ETF prices and dividend rates will vary based on market conditions and the performance of underlying stocks — results may, and will vary. For context, this fund has returned an impressive 18.26% year-to-date gain in 2024. That’s great if you already own shares, but if you’re looking to buy more using $500 every month, your purchasing power will erode as the share price rises.

On the downside, many of XEI’s holdings are dividend aristocrats – companies with histories of consistent dividend payments and increases – which can provide some income growth and stability, potentially protecting the fund’s price from plummeting.

Investor takeaway

This approach combines simplicity with sophistication, as one ETF provides instant diversification across numerous high-yield Canadian dividend stocks. The broad portfolio protects against individual stock risks, while BlackRock’s professional management ensures expert oversight with minimal fees. Monthly dividends offer more frequent compounding opportunities than quarterly payments, and the TFSA structure means all growth and income remain tax-sheltered.

Building wealth doesn’t require huge initial investments or complex strategies. With discipline, patience, and this straightforward approach, you can work toward creating a substantial core portfolio that could potentially provide meaningful passive income in the future.

Start your investment journey today – your future self will thank you.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Brian Paradza has no position in any of the stocks mentioned. The Motley Fool recommends Canadian Natural Resources. The Motley Fool has a disclosure policy.

More on Dividend Stocks

exchange traded funds
Dividend Stocks

1 Top High-Yield Dividend ETF to Buy to Generate Passive Income

BMO Canadian Dividend ETF (TSX:ZDV) is a great income ETF for those seeking a safe but generous passive-income boost.

Read more »

ways to boost income
Dividend Stocks

TFSA Investors: 3 Dividend Stocks to Buy and Hold Forever

These dividend stocks are likely to consistently increase their dividends, making them attractive investment for your TFSA portfolio.

Read more »

how to save money
Dividend Stocks

Passive-Income Seekers: Invest $10,000 for $59.75 Monthly Income

Passive-income seekers can transform their money into monthly cash flow streams through dividend investing.

Read more »

happy woman throws cash
Dividend Stocks

2 Canadian Dividend Stars Set for Strong Returns

You can add these two fundamentally strong Canadian dividend stocks to your portfolio now and expect steady income and strong…

Read more »

Man in fedora smiles into camera
Dividend Stocks

Is it Better to Collect the CPP at 60, 65, or 70?

Canadian retirees can consider supporting their CPP benefit by investing in blue-chip dividend stocks with high yields.

Read more »

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins
Dividend Stocks

2 TFSA Stocks to Buy Right Now With $3,000

These two TFSA stocks are perfect for those wanting diversification, long-term growth, and dividends to boot!

Read more »

The TFSA is a powerful savings vehicle for Canadians who are saving for retirement.
Dividend Stocks

TFSA: The Perfect Canadian Stocks to Buy and Hold Forever

Utility stocks like Canadian Utilities (TSX:CU) are often very good long-term holds.

Read more »

ETF stands for Exchange Traded Fund
Dividend Stocks

How to Use Your TFSA to Create $5,000 in Tax-Free Passive Income

Creating passive income doesn't have to be risky, and there's one ETF that could create substantial income over time.

Read more »