A 0.46% Monthly Yield That Belongs in Every TFSA

A 0.46% yield? Isn’t it too low? Dividend yields are annual, which means a 5% yield on $1,000 will give you $50 in a year. If this $50 is paid in 12 monthly installments, the monthly payout comes to $4.16, which is 0.416% monthly yield. Never see numbers in isolation. What might look like a low yield may be one of the best dividend stocks for your Tax-Free Savings Account (TFSA). The 0.46% monthly yield we are talking about is CT REIT (TSX:CRT.UN).

Why this 0.46% monthly yield belongs in every TFSA

CT REIT’s monthly dividend of $0.07903 is safe. The real estate investment trust manages to pay this distribution from the rental income it gets from Canadian Tire, its parent company. At 99.5% occupancy rate and 1.5% annual rent increase, CT REIT continues to enjoy a 2% average growth in rent revenue.

The REIT incurs capital costs for store expansion or betterment, which it recovers from the tenant either in the year it incurred or over the useful life of the improvement. This reduces the need for long-term debt to only property acquisition.

CT REIT has another arrangement with Canadian Tire, wherein it procures the land the retailer wants and leases to it. This whole arrangement has helped the REIT increase its property portfolio and funds from operations (FFO), and reduce debt as the property pays for itself. The assured occupancy from the parent makes CT REIT’s dividend safe.

How to make the most of CT REIT’s monthly yield in TFSA

The REIT offers a dividend-reinvestment plan (DRIP) that allows it to give units instead of cash. The cash retained today can be spent on building income-generating property.

For investors, a monthly dividend stock with DRIP means monthly compounding. If you invest enough that the monthly dividend can buy two units, you will have a little more than 24 new DRIP units in a year, and they will also generate income and increase the DRIP share count.

CT REIT also increases dividends by an average annual rate of 3% and offers 3% additional DRIP shares on the reinvested dividend. DRIP saves you brokerage fees and also gives 3% extra. If you compound dividends in a TFSA, you will also save on dividend tax as the investment can grow tax-free in it.

A monthly dividend of $36 can buy two units of CT REIT at around $18. The unit is currently trading near $17.35, but we are considering a higher amount to factor in the price change. For a $36 monthly dividend, you need 456 units that will cost $7,912. The monthly payout will increase in July.

How to increase the monthly yield to 0.73%

If you start a CT REIT DRIP in TFSA with 456 units, the first year would earn you 25.4 DRIP shares, and the fifth year would earn you 36 DRIP shares. Five years of the DRIP can earn you 152 income-generating units without you spending from your pocket. If you stop the DRIP and start payout from July 2031, you will get $689 in annual payout, which converts to $57.41 per month.

A $7,912 investment in 2026 can earn you $57.41 in monthly income in July 2031, increasing your monthly yield to $0.73%.

Year (July to June)DRIP units purchased @ $18Total CT REIT unitsCT REIT Dividend per share (3% CAGR)Annual PayoutReinvested amount (including 3% bonus)Jul 26 to Jun 27456.00$0.977$445.426$458.79Jul 27 to Jun 2825.49481.49$1.006$484.433$498.97Jul 28 to Jun 2927.72509.21$1.036$527.692$543.52Jul 29 to Jun 3030.20539.40$1.067$575.753$593.03Jul 30 to Jun 3132.95572.35$1.099$629.247$648.12As of July 1, 203136.01608.36$1.132$688.898

This compounding makes CT REIT a must-have stock in every TFSA. A one-time investment can automate your one source of passive income by the time you retire.

Note that the real numbers may differ as we compounded the dividend annually and kept the per unit cost at $18. In reality, the compounding will happen monthly, and the unit price will fluctuate.

The post A 0.46% Monthly Yield That Belongs in Every TFSA appeared first on The Motley Fool Canada.

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More reading

• How Owning 1,000 Shares of This Dividend Stock Could Generate $79 a Month in Passive Income
• One Canadian Dividend Stock That Could Help Steady a Volatile Portfolio
• A 5.7%-Yielding TFSA Pick That Pays Consistent Cash
• How to Create Your Own Pension With Dividend Stocks
• 4 Canadian Stocks to Buy if You Want Instant Income

Fool contributor Puja Tayal has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.