Creating a steady stream of passive income is a dream for many Canadians. With the Tax-Free Savings Account (TFSA), this dream can become a reality. The TFSA is an excellent vehicle for building a tax-free passive income stream. So today, let's guide Canadians through how they can start earning $250 per month in passive income through their TFSA.

Plan it out, and make it count

Earning $250 per month in passive income through a TFSA is achievable with careful planning and disciplined investing. By understanding your TFSA, choosing the right investment strategy, and staying committed to your financial goals, you can create a tax-free income stream that enhances your financial security and peace of mind.

First off, knowing your available contribution room is essential to avoid penalties. You can find this information through your Canada Revenue Agency (CRA) My Account. Remember, any unused contribution room is carried forward, and withdrawals from your TFSA are added back to your contribution room in the following year.

From there, choose your investment strategy. Depending on how much you want to earn and when, you could create a diverse portfolio. This could include dividend stocks and exchange-traded funds (ETF). You could then support it with real estate investment trusts (REIT) and bonds or guaranteed investment certificates (GIC).

Then, calculate your investment goals. If you want $250 a month, that will mean creating $3,000 per year. Once you have that number, you'll then go on to make automated contributions, as well as reinvestments. This can help achieve even more TFSA cash!

A stock to choose

Alright, so where should you invest? Again, investors should have a diverse mix. But if you're just starting with one, Capital Power (TSX:CPX) is a strong option. With a current dividend yield of 6.2%, translating to a quarterly payout of $2.46 per share, and robust financial performance, CPX stock is well worth considering.

In its most recent earnings report for Q1 2024, Capital Power significantly exceeded analyst expectations, reporting earnings per share (EPS) of $1.57 against the consensus estimate of $0.64. This strong performance was driven by revenues of $1.1 billion for the quarter. Such results reflect the companyâs ability to generate consistent cash flows and maintain a solid financial position.

Capital Power is committed to growth and expansion. The company recently acquired a 50.2% stake in Frederickson Power LP for $100 million, further enhancing its portfolio and operational capacity. Additionally, Capital Power is focusing on transitioning to a carbon-neutral future by 2045, underscoring its commitment to sustainable energy production.

Bottom line

To figure out how much you could earn in passive income, let's look at the compound annual growth rate (CAGR) of Capital Power stock in the last decade. That comes to a strong 11%! If that growth should continue, adding in dividends, here is how much you would need to invest to create $3,000 in passive income, or $250 per month.

In total, you'll have created $4,116 from a $24,000 investment. And all within the TFSA limit! This amount will give you future wiggle room as well for future passive income in the years to come â allowing you to enjoy growth year after year.

The post How to Use a TFSA to Earn $250 per Month in Tax-Free Passive Income appeared first on The Motley Fool Canada.