Yahoo Finance How to Use Your TFSA to Earn $5,000 Per Year in Tax-Free Income
Written by Andrew Walker at The Motley Fool Canada
Canadians are using their Tax-Free Savings Accounts (TFSAs) to build portfolios of diversified investments that can generate reliable passive income to help offset risings living costs.
The TFSA limit in 2023 is $6,500. This brings the maximum cumulative contribution room to $88,000 per person for anyone who has qualified every year since the government created the TFSA in 2009.
Are GICs or dividend stocks better to buy now?
Rates on Guaranteed Investment Certificates (GICs) are now above 5%. That’s a big improvement over recent years, and the return is now above the latest inflation rate of 2.8%.
GICs protect the principal investment and pay the agreed interest according to the terms of the certificate. Rates are currently above 5% for GICs ranging from one year to five years. Investors can usually choose to have the interest paid annually, semi-annually, or monthly, although the rate is often different depending on the frequency of the distribution.
Investors who don’t need the cash right away can also decide to compound the interest over the GIC’s term.
GICs are risk-free, as long as the amount is Canada Deposit Insurance Corporation protected. The downside is that you don’t have access to the principal during the term of the GIC, and the rate is fixed for the duration of the certificate.
Dividend stocks carry more risk, but can potentially generate much better returns than GICs. The steep rise in interest rates over the past year that has helped boost GIC rates has also led to a correction in the equity markets that is hitting some top TSX dividend stocks quite hard.
The pullback appears overdone in some cases, and income investors now have a chance to get great dividend yields from stocks that tend to increase their distributions at a regular pace.
At this point, it would make sense to have a mix of GICs and good dividend-growth stocks to both reduce risk and get a better average return.
BCE
BCE (TSX:BCE) has been a top pick among retirees for decades. The communications giant generates strong revenue and free cash flow to support dividend growth. BCE raised the payout by at least 5% per year over the past 15 years. Investors should see the trend continue, even as BCE faces some headwinds.
High interest rates are driving up borrowing costs to fund capital programs. This will impact 2023 earnings. BCE’s media group is also dealing with a decline in ad revenue that could persist for a while. Overall, however, the core mobile and internet business lines are expected to drive revenue and free cash flow growth in 2023.
BCE stock trades near $58.50 at the time of writing compared to more than $70 at the high point in 2022. The shares look oversold and offer a 6.6% dividend yield.
The bottom line on top investments for TFSA passive income
BCE is just one example of a top TSX dividend stock that offers a yield above GIC rates today. TFSA investors seeking passive earnings can easily put together a combination of GICs and top dividend-growth stocks to generate a 5.75% average yield right now.
On a TFSA of $88,000, that would provide $5,060 per year in tax-free passive income!
The post How to Use Your TFSA to Earn $5,000 Per Year in Tax-Free Income appeared first on The Motley Fool Canada.
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The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker owns shares of BCE.
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