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TFSA Passive Income: How to Easily Earn $425/Month TAX FREE!

A close up image of Canadian $20 Dollar bills
A close up image of Canadian $20 Dollar bills

Written by Robin Brown at The Motley Fool Canada

The Tax-Free Savings Account (TFSA) can become a passive-income compounding machine for Canadian investors. When you don’t have to pay any tax on investment income, you increase your returns by as much as 10-20% (depending on your tax bracket).

Earn 10-20% more passive income by investing through your TFSA

Over years, that extra 10-20% can be worth significantly more if it is given time to compound. That is why the TFSA is ideal for building a passive-income stream for the long term. Buy dividend stocks, earn income, buy more dividend stocks, and earn even more income. It’s a great recipe for compounding wealth.

Fortunately, many high-quality dividend stocks have recently become cheap and dividend yields are elevated. It is a great time to start building a passive-income portfolio.

Here is one hypothetical portfolio that could generate as much as $425 of tax-free monthly income. Foolish investors would be best served having a significantly more diversified portfolio (+10 stocks) than this. However, this is to demonstrate the attractive monthly income a TFSA can earn right now.

Pembina Pipeline

Pembina Pipeline (TSX:PPL)(NYSE:PBA) is a leading energy infrastructure company in Western Canada. While its stock is up 10% this year, it has fallen by 13% in the past month.

This is a solid stock for passive income, because over 85% of its revenues are contracted. When energy prices are high (like they are right now), it gets to earn a higher margin on the energy products it processes and re-sells. It just had a record first half of 2022.

It just increased its dividend 3.5%. Its stock has a 6.15% dividend yield today. If you put one-third of your TFSA capacity ($27,166) into Pembina shares at today’s price of $42.15, you could buy around 644 shares. That would earn you close to $139 of tax-free monthly dividends.

NorthWest Healthcare Properties REIT

NorthWest Healthcare Properties REIT (TSX:NWH.UN) is a Toronto-based real estate investment trust that operates hospital and medical properties around the globe. Its stock is down 24% this year.

Healthcare properties are incredibly consistent assets for passive income. NorthWest’s portfolio has very long-term leases (+14 years) and high-grade tenants (many government or government-backed tenants).

NorthWest trades with a 7.2% distribution yield today. If you put $27,166 of your TFSA into NorthWest stock, you could buy 2,650 units with a price of $10.25. That would earn $163 of tax-free monthly distributions.

Algonquin Power

Another very attractive passive-income stock is Algonquin Power and Utilities (TSX:AQN)(NYSE:AQN). This Oakville-based company operates regulated utilities and renewable power assets across North America.

Its stock is down 16% this year. The company is looking to complete a large utility acquisition in Kentucky. However, the process is taking longer than expected and the stock has recently been marked down. For the long term, the company has a very large capital plan that should drive solid earnings and dividend growth ahead.

Algonquin trades with a 5.6% dividend yield today. If you put another third of your TFSA portfolio into Algonquin stock, you could acquire 1,777 shares with a price of $15.28. That would make $380 every quarter, or $126 averaged monthly.

The takeaway on TFSA passive income

The recent market dip is presenting great opportunities to buy high-yielding dividend stocks for passive income. Put a diversified mix of dividend stocks in your TFSA, earn income, and re-invest it. This tax-free passive-income stream could one day sustain your lifestyle long into retirement.

The post TFSA Passive Income: How to Easily Earn $425/Month TAX FREE! appeared first on The Motley Fool Canada.

Should You Invest $1,000 In Algonquin Power and Utilities?

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Our market-beating analyst team just revealed what they believe are the 5 best stocks for investors to buy in September 2022 ... and Algonquin Power and Utilities wasn't on the list.

The online investing service they've run for nearly a decade, Motley Fool Stock Advisor Canada, is beating the TSX by 21 percentage points. And right now, they think there are 5 stocks that are better buys.

See the 5 Stocks * Returns as of 9/14/22

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Fool contributor Robin Brown has positions in Algonquin Power & Utilities Corp. The Motley Fool recommends NORTHWEST HEALTHCARE PPTYS REIT UNITS and PEMBINA PIPELINE CORPORATION. The Motley Fool has a disclosure policy.