If your goal is to make your tax-free savings account (TFSA) the foundation of your passive income strategy, the first step is to determine how much income you want.
If that goal is $900 per month, the next step is to work backwards from the monthly payout of whatever investment you choose. That sounds simple, but most dividend stocks pay quarterly, some pay monthly but fluctuate their distributions, and building a portfolio of only monthly payers can concentrate your risk on a handful of companies.
My preferred alternative is a monthly income fund. There are a few on the TSX, but the one with the longest track record and most consistent results is the Kano EIT Income Fund (TSX:EIT.UN). This is why.
What is EIT.UN?
EIT.UN is a closed-end fund (CEF), meaning it has a fixed number of units that trade on the stock market. Unlike an exchange-traded fund (ETF), new units are not created or redeemed every day, which can cause the market price to drift above or below net asset value (NAV).
Currently, the fund is trading at a slight discount, with a recent market price of $15.46 versus a net asset value of around $15.75. With that discount, buyers can acquire the underlying portfolio for slightly less than its intrinsic value.
The fund owns approximately 40 stocks, approximately 50/50 split between Canada and the US, and is actively managed. Management can also use leverage of up to 1.2 times, allowing the fund to boost returns by borrowing modestly against its assets. This magnifies profits during strong markets, but can also magnify losses during recessions.
The defining feature of EIT.UN is its fixed monthly benefit of $0.10. That payment is a combination of dividends, capital gains and capital return, making it much easier to stay within a TFSA and avoid tax reporting. Based on the recent price of $15.46, the fund yields approximately 7.75%.
Despite being marketed primarily as an income product, its long-term performance has been strong. With distributions reinvested, EIT.UN has achieved a total annualized return of approximately 12.6% over ten years, which is competitive with Canadian equity funds in the broad market.
How many shares for $900 a month
EIT.UN pays a flat fee of $0.10 per unit every month. To generate $900 per month, divide your target income by the monthly payout:
$900 ÷ $0.10 = 9,000 units
At a recent stock price of $15.46, buying 9,000 units would cost:
9,000 × €15.46 = €139,140
So you would need to invest approximately $139,140 to generate $900 per month, tax-free, within a TFSA.
Keep in mind that the $900 monthly payout is pre-tax, which is exactly why it makes sense to hold EIT.UN within a TFSA. Outside of a registered account, you’re dealing with a mix of dividend income, capital gains and capital returns, all of which can complicate tax reporting.
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