Yahoo Finance New TFSA Investors: How to Earn $325 Per Year in Passive Income on $6,500
Written by Andrew Walker at The Motley Fool Canada
Canadians are using their Tax-Free Savings Accounts (TFSAs) to build portfolios of investments that can generate reliable and growing streams of tax-free passive income to help cover rising living costs and provide additional income in retirement.
TFSA limit
The TFSA limit in 2023 is $6,500, bringing the cumulative maximum contribution space to $88,000 for any qualifying Canadian resident who was at least 18 years old when the government launched the TFSA in 2009.
The TFSA limit in 2024 will be at least $6,500. Increases to the annual TFSA limit are indexed to inflation and change in $500 increments. For example, the 2022 TFSA limit was $6,000.
TFSA contributions do not reduce your taxable income, as is the case with contributions to a Registered Retirement Savings Plan (RRSP). However, any profits earned inside a TFSA are tax-free and can go right into your pocket.
Withdrawals from the TFSA can be made at any time, and the amount taken out will open up equivalent new contribution room in the following calendar year in addition to the regular annual TFSA limit.
Best TFSA investments for passive income
In the current environment, Guaranteed Investment Certificates (GICs) pay good rates and should be on your radar. At the same time, the market correction that has occurred over the past year has driven down the share prices of many top TSX dividend stocks to the point where they look oversold and now offer dividend yields that are near or above the best GIC rates.
Investors who don’t want to take any risk and are comfortable getting 5-5.5% interest payments might want to put most of the funds in GICs. The downside is that the rate is fixed for the term of the GIC, and you do not have access to the invested funds until the GIC matures.
Stocks carry risks, as investors have seen in the past three years. Share prices can fall below the purchase price, and sometimes companies are forced to cut dividends. That being said, great dividend-growth stocks normally rebound from pullbacks, especially if they have reliable revenue streams and generate solid profits.
Each time a company increases the dividend, the yield on the initial investment goes up. This is important to keep in mind when comparing a five-year GIC rate of 5% to a dividend stock offering a similar or slightly lower yield but plans to increase the distribution every year for the next five years.
Fortis (TSX:FTS) is a good example to consider. The company has increased the dividend annually for 49 consecutive years and intends to boost the payout by 4-6% per year through at least 2027.
Fortis stock trades near $53.50 per share at the time of writing compared to more than $60 a few months ago. The pullback appears overdone, and investors can now get a 4.2% dividend yield.
A quick look at the long-term chart of FTS stock shows the share price tends to drift higher over time and that big dips are usually good opportunities to buy the shares.
TC Energy (TSX:TRP) is another top dividend stock that looks oversold. The board has increased the dividend annually for more than 20 years and plans to boost the payout by 3% to 5% per year over the medium term. At the time of writing, TRP stock provides a 7.7% dividend yield. Even if the share price doesn’t rebound you still get a great return.
The bottom line on TFSA passive income
TFSA investors can quite easily put together a low-risk portfolio of GICs and top TSX dividend stocks to get an average yield of 5% today or even higher if they buy high-yield dividend stocks.
On a $6,500 TFSA, a 5% return would generate $325 per year in tax-free passive income.
This doesn’t sound like much, but over time, investors who make their full TFSA limit contributions each year can quickly build up meaningful savings. A person who has a $65,000 TFSA right now could get $3,250 per year on an average yield of just 5%.
The post New TFSA Investors: How to Earn $325 Per Year in Passive Income on $6,500 appeared first on The Motley Fool Canada.
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The Motley Fool recommends Fortis. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker has no position in any stock mentioned.
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