Use a TFSA to Make $500 in Monthly Tax-Free Income

Many Canadians are now using the Tax-Free Savings Account (TFSA) exclusively to achieve their long-term financial goal, specifically retirement. However, the investment account’s versatility isn’t limited to a long-term retirement bucket.

TFSA account holders can create an inflation shield and generate a desired amount every month. In fact, making $500 in tax-free monthly income is possible with a lump-sum contribution today or through consistent, regular TFSA contributions over a period of time.

The fastest way to achieve the goal is to also pick companies that pay monthly dividends, not the traditional quarterly schedule. This strategy enables you to align the tax-free cash distribution with your monthly expenses. Reinvesting dividends to compound capital remains an option.

Two royalty stocks paying monthly dividends can form a twin cash-generating engine for income-focused TFSA investors. Freehold Royalties (TSX:FRU) and Diversified Royalty Corporation (TSX:DIV), both high-yield stocks but not dividend traps, continue to outperform the broader market thus far in 2026.

Activating and building a cash engine

The average dividend yield of Freehold Royalties and Diversified Royalty is 6.1%. TFSA investors with an accumulated or available contribution room of $97,700 can activate the cash engine overnight, generating $500.71 in monthly tax-free income.

This computation is strictly for illustration purposes and is intended for those with a significant amount of capital ready to invest. It also assumes an equal allocation of $48,850 each.

The Canada Revenue Agency (CRA) sets annual contribution limits. If you’re starting from scratch with the current $7,000 limit, it will take approximately 9.5 years to reach the $500 monthly target. The assumption here is a $3,500 investment in each stock annually and reinvesting every monthly dividend. Allow the two royalty stocks to work in your favour.

Strong business momentum

Freehold Royalties own lands in Canada and the U.S., where oil and gas producers operate. The $2.8 billion energy royalty company collects royalties from these operators or drillers. While the business model is low-risk, it is not insulated from the inherent volatility of the energy sector.

FRU benefits from rising commodity prices. As of this writing, the share price is $17.15, up nearly 16% year-to-date. The dividend yield is 6.3%. Its President and CEO, David M. Spyker, is confident that Freehold’s asset base will continue to generate meaningful cash flows. The company has never missed a monthly dividend payment since 1999.

High-flyer

Diversified owns trademarks and top-line royalties of ongoing business concerns such as Mr. Lube + Tires, Mr. Mikes, Air Miles, Sutton Group, Oxford Learning Centres, Nurse Next Door, and BarBurrito. Its U.S. royalty partners are Stratus Building Solutions and Cheba Hut.

Performance-wise, DIV is a high-flyer in 2026. At $4.75 per share, current investors enjoy a 31.4% year-to-date gain on top of the juicy 6% dividend. In Q1 2026, royalty income rose 12% to $17.3 million versus Q1 2025. Its CEO, Sean Morrison, notes the overall positive performance of the royalty partners. Dividend payments have been consistent since November 2014.

One-of-a-kind

The TFSA is a one-of-a-kind investment account. You can lock away capital and capitalize on the power of compounding to have a substantial retirement fund after a decade or more. You can also create a machine delivering a monthly tax-free income.

The post Use a TFSA to Make $500 in Monthly Tax-Free Income appeared first on The Motley Fool Canada.

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More reading

• Double Your TFSA Contribution With 1 Smart Strategy
• 3 Ultra-High-Yield Energy Dividend Stocks to Buy and Hold for 2026
• Create the Perfect June TFSA With a 6.3% Monthly Payout
• A Perfect June TFSA Stock With a 6.1% Monthly Payout
• 2 Dividend Stocks Paying Cash Every Month

Fool contributor Christopher Liew has no position in any of the stocks mentioned. The Motley Fool recommends Freehold Royalties. The Motley Fool has a disclosure policy.