Passive Income: How Much Do You Need to Invest to Make $400 Per Month?

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

This gets much easier when you use a fund with a managed distribution policy. These funds pool together income from multiple sources, such as dividends, interest income, capital gains, and sometimes return of capital, then pay investors a fixed amount on a regular schedule.

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

To keep things simple, this walkthrough uses Canoe EIT Income Fund (TSX:EIT.UN), a long-standing Canadian income fund. We will also assume the investment is held inside a Tax-Free Savings Account (TFSA), so the monthly income is tax-free.

Working backwards from the monthly payout

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 landing around the middle of the following month.

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

$400 ÷ $0.10 = 4,000 shares. So, to generate $400 per month, you 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 calculating the total capital required. As of December 17, the fund trades 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 be aware of before investing

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

At the current price, the yield works out to about 7.61%, which is attractive for income-focused investors. However, the market price can trade above or below the fund’s net asset value (NAV). At the time of writing, the market price is about $15.77, while the NAV is closer to $16.23. That means you are buying the portfolio at a discount, but there is no guarantee that the discount will ever close.

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

The post Passive Income: How Much Do You Need to Invest to Make $400 Per Month? appeared first on The Motley Fool Canada.

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More reading

• How to Use Your TFSA to Earn $900 Per Month in Tax-Free Income
• How to Earn a TFSA Paycheque Every Month and Pay No Taxes on It
• How to Use Your TFSA to Create $5,000 in Tax-Free Passive Income

Fool contributor Tony Dong 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.