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The concept of passive income is gaining popularity as it provides a means to control fear and generate steady returns. One way to maximize your investment returns and make them tax-free is by utilizing the Tax-Free Savings Account (TFSA) portfolio.
Here’s how to earn passive income in your TFSA portfolio. (Photo: IDFC Bank)
Earn Nearly $500 Per Month In Your TFSA Portfolio
By taking advantage of the TFSA, you can reinvest your dividends and compound your returns, ultimately leading to significant passive income, Yahoo reported.
So, how can you earn approximately $500 per month in passive income? Let’s explore two scenarios:
Scenario 1 involves investing $500 Monthly and Withdrawing Dividends. In this scenario, you invest $500 every month, which amounts to $6,000 per year, in a diversified portfolio of stocks that offer a 5.5% dividend yield.
The dividends earned by your portfolio are withdrawn. To achieve a monthly passive income of around $500, it would take approximately 18 years and a total investment of $1.08 million ($6,000 x 18).
Scenario 2 includes Reinvesting Dividends for Compounding Returns. In the second scenario, you also invest $6,000 annually with the same 5.5% dividend yield. However, instead of withdrawing the dividend income, you reinvest it back into the portfolio, effectively compounding your returns.
With this strategy, it would take approximately 13 years and a total investment of $78,000 ($6,000 x 13) to generate a monthly passive income of around $500.
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The table provided below illustrates the potential effects of compounding over time:
| Year | Investment | 5.5% Dividend Yield | Total Amount |
|---|---|---|---|
| 2023 | $6,000 | $6,000.0 | |
| 2024 | $6,000 | $330.0 | $12,330.0 |
| 2025 | $6,000 | $678.2 | $19,008.15 |
| 2026 | $6,000 | $1,045.4 | $26,053.60 |
| 2027 | $6,000 | $1,432.9 | $33,486.55 |
| 2028 | $6,000 | $1,841.8 | $41,328.31 |
| 2029 | $6,000 | $2,273.1 | $49,601.36 |
| 2030 | $6,000 | $2,728.1 | $58,329.44 |
| 2031 | $6,000 | $3,208.1 | $67,537.56 |
| 2032 | $6,000 | $3,714.6 | $77,252.12 |
| 2033 | $6,000 | $4,248.9 | $87,500.99 |
| 2034 | $6,000 | $4,812.6 | $98,313.54 |
| 2035 | $6,000 | $5,407.2 | $109,720.79 |
| 2036 | $6,034.6 |
Please note that the table is an estimate based on the assumption of a 5.5% dividend yield and no dividend cuts. The stock market is dynamic, and changes can occur that may affect your actual returns.
To help you get started on your journey towards earning $500 per month in passive income, consider investing in two stocks:
1. BCE (TSX: BCE): BCE is a dividend aristocrat with a track record of over 40 years of consistent dividends. With an annual dividend yield of 6.1% and a history of stable payouts, BCE presents an attractive investment opportunity.
2. TC Energy (TSX: TRP): TC Energy has a 23-year history of paying dividends and has been growing them at a compounded annual growth rate (CAGR) of 7%. While the dividend growth rate has slowed to 3%, TC Energy’s dividend yield is currently at 6.84%, offering a potential opportunity for higher returns.
Investing $3,000 in each of these stocks can help you lock in higher yields and potential dividend growth. Diversifying your portfolio with stocks from different sectors can further reduce downside risks.
Remember, the goal of earning passive income requires long-term commitment and a sound investment strategy. Keep an eye on your TFSA portfolio’s dividend yield and be prepared to adjust your approach if any of the companies you invest in cut their dividends.
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