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Are you one of those people who dream of hassle-free passive investment income? The idea of being able to sit back and collect monthly dividend payments without lifting a finger is certainly appealing. But how can you make this dream a reality?
While there are several popular methods such as For example, in rental properties and peer-to-peer lending, there is a simple and often overlooked way to generate passive income – by using a Tax-Exempt Savings Account (TFSA) in combination with a high-yielding stock exchange. traded fund (ETF). Let’s look at how this works.
First, max out your TFSA
Contributing to your TFSA should be your top priority when it comes to generating passive income. This is because all Canadian dividends and interest earned and deducted in a TFSA are tax exempt. This means more money stays in your pocket and not paid to the Canadian tax authorities!
The amount you can contribute to a TFSA depends on your date of birth, but if you never invested in a TFSA before 2023 and turned 18 before 2009, you may have up to $88,000 in contributing space. The contribution limit increases each year and is $6,500 for 2023.
Invest in the right ETF
Once you have a fully funded TFSA of $88,000, it’s time to select an income-generating asset. While you could put that in a Canadian dividend stock (and The Fool has some great recommendations at the end of this article), that approach isn’t the best for diversification.
My suggestion is to use an ETF like CI Energy Giants covered call ETF (TSX:NXF). This ETF holds 15 of North America’s largest energy companies and uses a covered call overlay to maximize its returns. Currently, the ETF has a trailing 12-month return of 11.44%, which is paid quarterly.
Calculate income potential
Assuming NXF’s last monthly distribution in December of $0.1898 and the current share price at the time of writing of $18.41 holding steady, an investor buying $88,000 worth of NXF could see the expect the following quarterly payment:
| COMPANY | NEW PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY |
| NXF | $6.10 | 14,426 | $0.1898 | $2,738 | Quarterly |
On a monthly basis, this works out to around $912. Note that this forecast is based on NXF’s most recent dividend payment and current share price and is subject to change in the future depending on the performance of NXF’s underlying shares and market volatility.
It’s also worth noting that NXF’s share price won’t rise much as it converts upside potential into immediate returns. Younger investors who don’t need the passive income might also be better served investing their TFSA for growth (and The Fool has some great stock suggestions for that below!)
