Neglect rental properties—one of the best passive-income device you may not be using to its fullest is the Tax-Free Financial savings Account (TFSA).

Whereas sometimes celebrated for its progress funding potential, the TFSA may also be a superb supply of tax-free earnings.

For those who’re seeking to construction your TFSA to generate $250 monthly in passive earnings, right here’s how one can set it up.

Selecting the correct ETF

For those who’re seeking to generate earnings with a smaller funding, a better yield is essential.

Whereas some dividend shares and royalty trusts may provide 6-8% yields, I like to recommend an exchange-traded fund (ETF) for higher diversification and common month-to-month payouts.

Take into account Hamilton Enhanced Multi-Sector Coated Name ETF (TSX:HDIV).

HDIV holds a diversified portfolio of eight different Hamilton ETFs, every using a coated name technique aligned to mirror the sector composition of the S&P/TSX 60.

In a coated name technique, the ETFs promote rights—generally known as name choices—to different traders.

These choices enable patrons to buy shares throughout the ETF at a predetermined worth earlier than a selected date. Promoting these rights generates fast earnings from the premiums paid by the patrons.

Nonetheless, whereas promoting coated calls can restrict HDIV’s share worth progress because of the capping of upside potential, it constantly earns premiums, that are distributed month-to-month.

Including one other layer, HDIV employs leverage, that means it might borrow as much as 25% of its complete worth to take a position additional into its underlying ETFs, amplifying each the dangers and returns throughout market fluctuations.

As of July 31, HDIV presents an 11.98% yield, and over the past three years, with dividends reinvested, it has supplied an annualized return of 11.37%.

The truth is, the ETF has managed to outperform the TSX 60 up to now, though traders ought to needless to say future outperformance shouldn’t be assured.

How a lot do it’s essential make investments?

Assuming HDIV’s most up-to-date August month-to-month distribution of $0.171 and the present share worth on the time of writing of $16.34 remained constant shifting ahead, an investor utilizing a TFSA would wish to purchase roughly $23,889 price of HDIV, akin to 1,462 shares to obtain round $500 month-to-month tax-free.