Yahoo Finance How to Use Your TFSA to Earn $4,750 in Annual Passive Income
Written by Andrew Button at The Motley Fool Canada
Do you want to earn thousands in annual passive income in your TFSA?
In a way, it’s a silly question, because everyone wants more income, not less. But having a clear goal of getting to multiple thousands in annual passive income and just daydreaming about it are two different things. Many people who “want” more money buy lottery tickets, which are statistically likely to result in losses. Actually obtaining passive income in a reliable fashion requires a game plan. In this article, I will explore a relatively straightforward method for getting to $4,750 in annual passive TFSA income.
Invest in GICs
Investing in guaranteed investment certificates (GICs) is the safest and easiest way to get passive income. GICs are bond-like instruments offered by banks providing you with a bit of interest at maturity in exchange for agreeing to have your money locked up for a while. The GIC principal is insured by the Federal Government, so GICs are among the least risky assets out there.
There is a way to get $4,750 in passive GIC income in a TFSA. In order to do it, you must satisfy one of the following conditions:
Have been at least 18 years old in 2009. If you meet that condition, then you should have either $95,000 in unused TFSA contribution room, or some combination of actual TFSA savings and unused contribution room. If your investments realized negative returns over the course of your life, then you could have less than $95,000 in TFSA space, but with the markets being as hot as they’ve been in recent years, that’s unlikely to be the case.
Have accumulated $95,000 in TFSA savings through some other means, such as having realized positive capital gains.
It is possible to find GICs yielding 5% today. For example, the Canadian bank EQB Inc offers such a yield on some of its long-term GICs. If you invest $95,000 into a 5% yielding one-year GIC, then you will get $99,750 back at the maturity date. Of that, $4,750 of the $99,750 represents the return.
Stocks can get you even more income
You can get even more passive income with stocks than you can with GICs. In the world of stocks, you can find yields pushing 6%, 7%, or even 10%. With such yields, you can get far more than $4,750 per year in a TFSA.
One example of such a stock is the Toronto-Dominion Bank (TSX:TD). It’s Canada’s second biggest bank. Its shares offer a princely 5.4% yield. Invest $95,000 at that yield, and you get $5,139.50 back in annual passive income!
Why does TD have such a high yield?
Partly, it’s a matter of how markets view TSX banks as a whole. These stocks are generally very cheap, with yields above 4% being the norm. The reason they don’t get bid up more is because they are not seen as having much growth potential.
Another reason why TD has a high yield is because it faces considerable legal risk. The bank is being investigated by the U.S. Department of Justice for money laundering infractions. Some TD tellers were found laundering money for drug cartels in New Jersey, New York, and (allegedly) in Florida. TD has already booked $615 million in fines related to these investigations. That’s not a good thing, but if TD only takes the $2 billion in fines that analysts expect it to take in the coming years, then its dividend will be paid without issue. In a scenario wherein TD takes tens of billions in fines, like Bank of America did in the aftermath of the SMC scandal, there could be some issues.
The post How to Use Your TFSA to Earn $4,750 in Annual Passive Income appeared first on The Motley Fool Canada.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Fool contributor Andrew Button has positions in Bank of America and Toronto-Dominion Bank. The Motley Fool recommends Bank of America and EQB. The Motley Fool has a disclosure policy.
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