Yahoo Finance How Much Can You Really Earn in Passive TFSA Income?
Written by Andrew Button at The Motley Fool Canada
Have you ever wondered how much money you can actually earn in tax-free, passive Tax-Free Savings Account (TFSA) income?
There are articles out there promising all kinds of figures, most of which are a bit unrealistic. Sure, if you have $1 million to invest, then you can get $30,000 per year in passive income pretty easily. But if your starting amount is lower than that, you can still get some cash flow going with much less invested. Here’s how much.
Up to $4,400 per year
If you invest $88,000 — the maximum amount you can contribute to a TFSA — you can get $4,400 per year in passive tax-free income. This requires a slightly above-average dividend yield, but not one so high that you’re really pushing it with risk in order to achieve it. At a 5% yield, you can get $4,440 in annual cash back with $88,000 invested.
How the math works on that
If you’re wondering how $88,000 in investments could produce $4,400 per year in passive income, here’s how the math works.
Multiply $88,000 by 0.05. You get to $4,400. Therefore, if you invest at a 5% yield, you get $4,400 back in annual tax-free passive income. That’s assuming, of course, that you hold your entire portfolio in a TFSA — which is doable if you were 18 or older in 2009, as $88,000 worth of space has accumulated since then.
Some stocks that could get you there
Once you’ve got some money deposited into a TFSA, the next step is to invest your money. You’ll have to start small, but if you have $88,000 in savings, you can deposit that amount right away. Otherwise, you can get to that amount by contributing smaller amounts over a period of years.
You could start building up a diversified TFSA portfolio yielding 5% with a position in Enbridge (TSX:ENB). Enbridge is a Canadian pipeline company with very stable revenue. It “rents” space on its pipelines to oil and gas companies, who typically agree to remain clients for long periods of time. As a result, its revenue is stable and dependable.
Now, Enbridge has a 6.6% dividend yield. You’ll actually get much more than $4,400 per year in passive income if you invest $88,000 in it. So, why not just do that?
COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY |
Enbridge | $49.82 | 1,240 | $0.8875 ($3.55 per year) | $4,400/year | Quarterly |
It comes down to risk. It pays to diversify your holdings so that you’re not too exposed to too much risk in one company. Enbridge has very stable revenue and cash flows, but it also pays out more in dividends than it earns in net income or free cash flow. That creates dividend risk. So, instead of investing all of your money in Enbridge, you can invest in a whole portfolio of stocks like TD Bank, Bank of Nova Scotia, Enbridge, and Fortis to get about a 5% yield. This will get you to $4,400 per month if the stocks are equally weighted and you invest $88,000.
Of course, the best risk-management strategy is to invest in more than just four stocks. Unless you have extremely deep knowledge of individual companies, it’s best to hold 25 stocks or more. You can even buy the whole market through an index fund, though that won’t produce the kind of income described in this article.
The post How Much Can You Really Earn in Passive TFSA Income? appeared first on The Motley Fool Canada.
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Fool contributor Andrew Button has positions in Toronto-Dominion Bank. The Motley Fool recommends Bank Of Nova Scotia, Enbridge, and Fortis. The Motley Fool has a disclosure policy.
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