Passive Income: How Much Do You Need to Invest to Earn $400 a Month?

If your goal is to generate passive income, a big part of the process is setting a clear goal and choosing investments that actually support it. That sounds simple, but in practice it is not. Investors have to deal with variable dividend policies, taxes and the very real risk of dividend cuts.

This becomes much easier if you use a fund with a managed distribution policy. These funds pool income from multiple sources, such as dividends, interest income, capital gains and sometimes capital returns, and then pay investors a fixed amount on a regular basis.

With a predictable monthly payout, you can work backwards and calculate exactly how much you need to invest to reach an income goal. In this case, that goal is $400 per month.

To keep things simple, this walkthrough uses Kano EIT Income Fund (TSX:EIT.UN), a long-standing Canadian income fund. We also assume that the investment is held in a tax-free savings account (TFSA), so the monthly income is tax-free.

Retroactive from the monthly payment

One of the defining features of this fund is its fixed monthly distribution of $0.10 per share. The fund typically goes ex-dividend around the middle of the third week of each month, with the cash payment taking place around the middle of the following month.

This means the math is simple. Each share you own pays $0.10 per month. If your goal is $400 in monthly income, divide the income goal by the monthly payout per share.

$400 ÷ $0.10 = 4,000 shares. So to generate $400 per month, you would need to own 4,000 shares of the fund.

How much money do you need to invest?

Once you know how many shares you need, the next step is to calculate the total capital required. As of December 17, the fund is trading at approximately $15.77 per share.

4,000 shares × $15.77 = $63,080

That means you would need to invest about $63,080 in your TFSA to generate $400 per month in tax-free income, assuming the distribution remains unchanged.

Things to consider before investing

While the income calculation is clean, it’s important to understand what you’re buying. This is an actively managed Canadian income fund with a relatively concentrated portfolio of about 40 stocks, roughly evenly split between Canadian and U.S. companies.

At the current price, the yield works out to around 7.61%, which is attractive for income-oriented investors. However, the market price may trade above or below the fund’s net asset value (NAV). At the time of writing, the market price is around $15.77, while the NAV is closer to $16.23. That means you’re buying the wallet at a discount, but there’s no guarantee the discount will ever go away.

There are also trade-offs. The management fee is around 1.10%, which is high. The fund can also use leverage up to 1.2, meaning it can borrow to invest. Leverage can increase income and returns, but it also increases downside risk during market downturns. This is not a low-risk product, even though the monthly payout is stable.