Are you wondering how to turn a modest sum of money – let’s say $25,000 – into consistent monthly cash flow?
If so, you have to think about what you’re going to hold in your TFSA.
Not every stock out there pays dividends monthly. As for bonds, those usually pay semi-annually! Some guaranteed investment certificates (GICs) pay monthly, but they don’t offer a whole lot of yield these days. Quite frankly, the options are limited.
Nevertheless, options for monthly income do exist!
In the world of real estate investment funds (REITs), monthly payouts are the rule. Monthly payouts are also not uncommon among exchange-traded funds (ETFs). Both options just mentioned often yield more than the 2.75% you’ll get with GICs these days. In this article I explore what I consider to be the simplest and most effective way to turn $25,000 into consistent monthly cash flow.
Invest in index funds
Investing in monthly-pay index funds is probably the simplest way to turn a $25,000 TFSA into consistent monthly cash flow. The idea is very simple.
The reason I prefer index funds over REITs for most investors is because the former are among the most diversified and “user friendly” investments out there. Investing intelligently in a REIT usually entails substantial research to ensure the REIT is financially sound and profitable. With index funds, you don’t need to think about nearly as much as you do with REITs – the diversification usually takes care of the returns for the underlying portfolio. Your main job as an investor buying an index fund, is to ensure you don’t pay too high a management fee.
An example of a good dividend fund
One dividend fund that could supply considerable monthly cash flow to your TFSA is the Vanguard FTSE Canada High Yield Dividend Index ETF (TSX:VDY). This is a dividend fund with a monthly payout schedule and a 3% yield. A yield of 3% is almost a full percentage point higher than the Canadian market averages right now. If you’re someone who relies on their investments to meet his/her monthly expenses, then VDY’s monthly payout schedule could help with that. The fund’s management expense ratio (MER) is 0.22%, which is low for a thematic fund. So, VDY checks all the boxes you’d want an index fund to check.
Income potential
How much monthly cash flow can you get with $25,000 invested in VDY in a TFSA?
Well, first things first, TFSAs are tax free, which means the dividends you earn are the dividends you keep.
Second, VDY’s dividend has been averaging about $0.20 per month (with funds, dividends tend to vary a lot), annualizing to $2.40 per year. At today’s unit price of $78.79, this fund should provide about a 3.046% dividend yield. That means $3,046 per year, or $254 per month, if the dividend doesn’t change. Here’s the math on that:
So, just $25,000 in VDY in a TFSA can give you roughly $254 per month in cash flow if the yield never changes. Not bad at all!
