The Tax-Free Savings Account (TFSA) can be a great tool to earn monthly passive income. Very few companies pay monthly dividends, and most of them are either real estate or royalty businesses. Neither of them grows its dividends significantly. However, there is another way to earn monthly income apart from monthly dividend stocks.
A robust way to earn TFSA monthly income
Most Canadian companies with high dividend growth pay quarterly dividends. Each of them has a different quarterly schedule. You can use this to your advantage to build a dividend ladder.
The first step is to create three groups of quarterly dividend stocks:
- Group A: Payout dates in March, June, September, and December.
- Group B: Payout dates in April, July, October, and January.
- Group C: Payout dates in May, August, November, and February.
I have identified three stocks for each group.
Three TFSA stocks for a monthly payout
Canadian Natural Resources (TSX:CNQ) has a 25-year dividend growth history. Its advantage is low cost and slow-depleting oil sands reserves. A strong capital allocation strategy and financial discipline have helped it navigate oil and gas price fluctuations while paying dividends. The company integrates production and dividend cost into its breakeven price, which is mid-$40/barrel. It aims to maintain a net debt level of $13 billion and use 100% free cash flow to buy back shares and pay dividends. Although CNQ has grown dividends in the 2%–50% range, with an average annual growth rate of 20%, we maintain a conservative dividend growth target of 8%.
Financial services holding company Power Corporation of Canada (TSX:POW) derives its dividends from its operating companies IGM Financial and Great West Lifeco. You get access to North American and European financial markets. The premium and management fees earned from insurance policies and mutual funds bring in dividends. Power Corporation is vulnerable to financial crisis as it paused dividend growth after the 2008 Global Financial Crisis. It resumed dividend growth in 2015 and has been growing it at a 7% average annual rate since then.
Although the Canadian telecom market is riddled with risks of dividend cuts, Cogeco Communications (TSX:CCA) stands out. Not having invested billions of dollars in fibre infrastructure, it leases it from BCE and Telus. In 2024, it extended its services beyond broadband to include wireless. Like other telcos, even Cogeco is feeling the heat of price competition in the wireless space, but its existing operations help it earn regular cash flow. CCA stock has grown dividends in 15 out of the last 16 years. Since its entry in the wireless market, dividend growth has slowed to 8% from the previous 10%.
How to invest $25,000 to earn $183 a month in a TFSA
Canadian Natural Resources and Power Corporation of Canada may not look attractive because of their 4% and 2.9% dividend yield. But when placed in a bond ladder strategy, they can maximize returns.
A $25,000 investment distributed evenly among the three, with an $8,300 investment in each stock, can help you generate $1,103 in annual dividends. Since each of their dividend payment dates is different, you can get an assured income every month. However, the monthly income may vary as all three have different yields.
Building a dividend ladder might give different amounts each month, but it will help diversify your income sources across sectors. All three companies are uncorrelated and have a strong history of paying and growing dividends. REITs can give you 3–4% growth at most, but these stocks can give an average of 8% dividend growth.
If the above stocks grow their dividends at an average annual rate of 8%, your total dividend will double in 10 years.