A TFSA pick with a 6.16% yield that consistently pays out cash

Being able to make money without lifting a finger is a dream that many Canadians don’t fully realize how easy it is to achieve. There are plenty of ways to generate passive income in Canada. With the right tools and the right investments in the best retirement accountsyou can even make that extra income tax-free.

The Tax-Free Savings Account (TFSA) is an incredible account type that was introduced in 2009 to encourage Canadians to improve their savings habits. The account essentially allows you to contribute to it with after-tax dollars. This way you can enjoy the return on your funds in the account without having to pay taxes.

For any cash you hold in the account, this means no taxes are charged on the interest income. However, using the TFSA to only hold cash is a waste of space in my opinion. You can use the savings account as one investment vehicle and get more out of it. Any equity returns in the account are also tax-free. This means you can enjoy dividends and capital gains tax-free.

A monthly dividend paying stocks like Royalties owned (TSX:FRU) could be an excellent example to consider.

Royalties owned

Freehold Royalties is a $2.88 billion market capitalization loyalty revenue trust engaged in acquiring and managing oil and gas royalties. The trust offers you the opportunity to leverage the performance of an income-producing asset with strong margins and lower risk exposure in an otherwise higher-than-normal sector. This Canadian energy sector royalty income trust is a favorite of mine. At the time of writing, it is trading at $17.54 per unit, with investors paying $0.09 per share per month, which translates into a juicy 6.15% annualized dividend yield.

Freehold is not a typical energy stock. The company is not directly involved in the production of crude oil and natural gas, unlike most energy stocks traded on the TSX. The company does not make money by spending time and capital setting up drilling rigs, wells and pipelines. The company also does not generate revenue from transporting crude oil and gas for oil producers. Instead, it generates revenue by giving others access to its assets.

The trust owns more than seven million hectares across Canada and the US, spanning shale basins and conventional oil regions. The counterparties use the land to extract resources from it and pay the trust a portion of what they generate from the land. Freehold is a pure royalty company. This means that the company does not have the overhead costs that energy companies usually have to deal with.

Without operator fees, Freehold has significantly larger margins and only collects its share of production revenues. This in turn can mean a much better ability to deliver returns to investors who own shares of the trust. You don’t see energy stocks posting margins of around 51%. The royalty model gives Freehold Royalties this advantage, which also benefits investors.

Silly takeaway

Freehold Royalty has an excellent management team that aims for a payout ratio of approximately 60% of free cash flow. This helps the company keep its monthly payouts to investors sustainable by creating a cushion when oil prices fluctuate downward. While that means returns won’t be significantly higher during periods of oil price booms, it also protects investors from downturns in oil prices.

If you’re looking for a reliable dividend stock that pays every month for your self-directed TFSA portfolio, I’d seriously consider Freehold Royalties.