How to Turn a $14,000 TFSA Into a Cash-Generating Machine

For passive income investors, a principal of around $14,000 isn’t going to be massive, and while it might be tempting to take on considerably more risk for a shot at those mega-yielders, even in today’s lower-rate world (the TSX Index is yielding quite a bit less than in recent years), I’d argue that continuing to go for the top-tier dividend growers that can appreciate over time is the way to go.

At the end of the day, I think investors should look to be in growth mode rather than passive income mode, at least until a more significant amount is saved up in a TFSA (Tax-Free Savings Account).

Either way, though, this piece will look into potential investments that can help stretch such a sum so that it can help reduce a bit of the impact of the inflation that’s to come. Indeed, every little bit of income flowing in passively can help, especially if we take the effects of taxation out of the equation. But have realistic expectations and understand the trade-offs between going for a passive income strategy rather than a growth strategy.

Passive income over growth for a TFSA? Does it make sense?

In my humble opinion, investors looking to compound their wealth with a $14,000 sum may wish to reinvest every penny of dividends that come in. At the end of the day, the effects of tax-free compounding are that much more impressive when you reinvest, rather than withdraw dividends or distributions that come flowing in.

Of course, if we’re talking about a $140,000 TFSA, a passive income strategy really starts to move the needle. In any case, if you’re keen on what a $14,000 TFSA is capable of on the income front, consider something like the BMO Canadian High Dividend Covered Call ETF (TSX:ZWC), which incorporates a covered call strategy that allows for a premium income jolt added on top of the dividends collected from holdings within the ETF. It’s a nice sprinkle on top, and one that entails a bit more labour on the part of the fund’s managers.

You’ll pay a slightly higher MER (management expense ratio) as a result. For someone with a lower five-figure amount in a TFSA, I’d argue that going for a lower-MER indexing ETF or a growthier play with a lower yield might make more sense. When it comes to something like the ZWC, though, the yield sits at 5.6% at the time of this writing. That’s still a pretty decent payout, and it can help alleviate some of the stresses in your monthly budget.

What kind of income could a $14,000 TFSA generate exactly?

Based on a $14,000 TFSA, you’d be looking at $784 annually. It’s tax-free, but it ain’t a game-changer that’s for sure. It works out to around $65 and change per month. That’s good enough to cover a few subscriptions every month, but hardly anything to level up your lifestyle. That’s why going for growth and dividend growth might be the move for investors who are still building their TFSAs.

Can you stretch your yield further than the ZWC, which is a diversified basket of dividend payers with an options-writing strategy alongside it? Most definitely.

Telus (TSX:T) has a 9.7% yield right now. Based on $14,000, that’d work out to just over $1,300 in annual income or just over $113 per month. That’s a fairly decent amount of pocket money to have in any given month, especially given the modest amount of principal we’re talking about, but a name like Telus does come with its own fair share of risk.

Either way, the big question is whether Telus’ dividend can last, as the firm considers its next move after the dividend growth pause. In my humble opinion, I’d much rather focus on growth and dividend reinvesting than drawing down income with a $14,000 TFSA.

The post How to Turn a $14,000 TFSA Into a Cash-Generating Machine appeared first on The Motley Fool Canada.

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More reading

• 2 TFSA Dividend Stocks I’d Lock in Now for Long-Term Income 
• A Simple Way for Canadians to Earn $500 a Month Tax-Free From a TFSA
• Should You Buy This TSX Dividend Stock for its 9.8% Yield?
• This Canadian Stock Is Down 22% and Nearly Perfect for Long-Term Investors
• Beyond TELUS: A High-Yield Stock Perfect for Income Lovers

Fool contributor Joey Frenette has no position in any of the stocks mentioned. The Motley Fool recommends TELUS. The Motley Fool has a disclosure policy.