Yahoo Finance TFSA Wealth: How to Earn an Average of $200 Per Month Tax-Free
Written by Andrew Walker at The Motley Fool Canada
The steep jump in the cost of living over the past few years is pushing retirees and other income investors to seek out better yields on their savings. One way to get more income and avoid paying extra tax is to hold Guaranteed Investment Certificates (GICs) and dividend stocks inside a self-directed Tax-Free Savings Account (TFSA).
GIC rates and dividend yields
High inflation has forced the Bank of Canada to raise interest rates significantly to try to cool off the economy and get the jobs market back into balance. The result could be a recession and a surge in unemployment that eventually leads to another reduction in interest rates as inflation subsides.
In the meantime, the upside of soaring interest rates is a big jump in the rates financial institutions will pay investors on GICs. Savers can now get GICs from Canada Deposit Insurance Corporation (CDIC) members that offer rates above 5% with interest paid monthly, semi-annually, or annually depending on the GIC.
July inflation came in at 3.3% in Canada, so a 5% risk-free return on savings is attractive today.
The other impact of steep rate hikes has been a market correction over the past year that has hit top TSX dividend stocks quite hard. Investors can now get dividend yields above 6% and 7% from great Canadian dividend payers that have good track records of distribution growth.
Stock prices can be volatile, and companies that get into financial trouble sometimes cut or eliminate dividends. However, the pullback looks overdone at this point in many cases, and patient investors can reap some big yields while waiting for the stock prices to recover.
TFSA limit
The TFSA limit for 2023 is $6,500. That brings the cumulative maximum TFSA contribution room to $88,000 for anyone who has qualified since the launch of the TFSA in 2009. Income earned inside the TFSA is tax-free and can be taken out at any time. The full value of all withdrawals from a TFSA during the year will open up equivalent new TFSA contribution space in the following calendar year. This is in addition to the regular annual TFSA limit increase. In 2024, the TFSA limit will be at least another $6,500.
Best way to earn TFSA passive income
In the current environment, it would make sense for most people to allocate new TFSA funds to a combination of GICs and quality dividend stocks. The GIC reduces overall savings risk, but it also locks up the funds for the term of the GIC, so investors have to keep that in mind if they think you might need access to the money.
High-yield dividend stocks will boost the average yield on savings, and many top dividend payers continue to raise their dividends. Leading dividend-growth stocks should eventually see their share prices recover when interest rates start to come down again.
Top dividend stocks to consider right now could be Telus, Bank of Nova Scotia, and Enbridge. All three pay attractive dividends that should continue to grow and currently offer dividend yields of 6.3%, 6.7%, and 7.5% respectively.
Ongoing volatility is expected in the coming months, but there should be limited downside at this point in these stocks, and you get paid well to ride out the turbulence if things get really ugly.
The bottom line on TFSA passive income
TFSA investors can quite easily put together a diversified portfolio of GICs and top dividend stocks to get an average yield of 6.00% today. On a TFSA of just $40,000, this would generate $2,400 per year in passive income. That’s an average of $200 per month!
The post TFSA Wealth: How to Earn an Average of $200 Per Month Tax-Free appeared first on The Motley Fool Canada.
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The Motley Fool recommends Bank Of Nova Scotia, Enbridge, and TELUS. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker owns shares of Enbridge.
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