TFSA Investors: How to Grow Your Tax-Free Income to $8,000/Year

Here’s how you can grow your tax-free income to +$8,000 per year in your TFSA with two top dividend stock picks to get you started!

| More on:

What you earn inside your Tax-Free Savings Account (TFSA) is tax free, as long as you avoid foreign dividends with foreign withholding taxes, which depend on the foreign countries in question. For example, if you receive U.S. dividends in your TFSA, 15% of the dividends will be withheld by the United States. And you can’t get those taxes back.

If you were eligible and have contributed to your TFSA since its inception in 2009, you could have contributed as much as $75,500, which averages just under $5,808 of contributions per year (or $484 per month).

If your portfolio yield was 3% and it grew by 7% a year, your TFSA would be $152,678 by the end of this year. If you reinvested all received dividends for a 7% return as well, the portfolio would be $223,797.

The TFSA limit for this year is $6,000, which means you need to save and invest $500 a month in your TFSA to take full advantage of the tax-free compounding. Of course, you can contribute a lump sum, but it’s easier to save if you do so regularly and consistently.

If it works for you, set up an automatic transfer of $500 monthly from your chequing account to your TFSA to secure that savings.

A yield of 3% on a $152,678 TFSA portfolio would generate $4,580 of tax-free income a year. A $223,797 TFSA would generate income of $6,714!

By continuing to maximize your TFSA every year and aiming for an overall yield of 3% and growth of 7%, it wouldn’t take long to achieve $8,000 of tax-free income a year.

Where to get a 3% yield and 7% growth today?

Our writers’ top TSX stock picks for September 2021 include potential dividend stocks that more than fit our criteria! Chris MacDonald recommended Manulife (TSX:MFC)(NYSE:MFC) as a top value pick. I’ve got to agree that Manulife provides excellent value.

At $24.56 per share at writing, the large-cap life and health insurance stock provides a yield of almost 4.6%. Additionally, it’s forecasted to grow its earnings per share by 14.8% per year, likely with the help of higher growth in its operations in China.

Even if it were only to grow at half of that rate, it’ll still more than meet our 7% target growth rate. Furthermore, if it proves to achieve this mid-digit growth rate consistently, it should trade at a higher multiple. Valuation expansion should drive even greater growth. Over the next five years, there’s a good chance that Manulife will fulfill our financial goal.

My top pick was Canadian Net REIT (TSXV:NET.UN), which yields almost 3.9%. It has increased its dividend at a compound annual growth rate of 14% in the last three years, which is awesome!

The commercial real estate company is based on a very solid business model with a foundation of triple-net and management-free leases. Its top tenants are grocery chains or publicly listed companies. In addition, it experiences extraordinary growth by pursuing assets — in the sweet spot — too large for individual investors but too small for large firms. Therefore, the company was able to maintain 99% occupancy last year during the pandemic with substantial growth across key performance metrics!

Interestingly, the dividend stock is trading at roughly a 19% discount from its multi-year normal valuation since 2014. So, it’s an incredible addition for TFSA investors seeking tax-free income and growth.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool recommends Canadian Net Real Estate Investment Trust. Fool contributor Kay Ng owns shares of Canadian Net Real Estate Investment Trust.

More on Dividend Stocks

Train cars pass over trestle bridge in the mountains
Dividend Stocks

Is CNR Stock a Buy, Sell, or Hold for 2025?

Can CNR stock continue its long-term outperformance into 2025 and beyond? Let's explore whether now is a good time to…

Read more »

coins jump into piggy bank
Dividend Stocks

The Smartest Dividend Stocks to Buy With $500 Right Now

These top dividend stocks both offer attractive yields and trade off their highs, making them two of the best to…

Read more »

Middle aged man drinks coffee
Dividend Stocks

Here’s the Average TFSA Balance at Age 35 in Canada

At age 35, it might not seem like you need to be thinking about your future cash flow. But ideally,…

Read more »

ETF stands for Exchange Traded Fund
Dividend Stocks

How to Invest Your $7,000 TFSA Contribution in 2024

Here's how I would prioritize a $7,000 TFSA contribution for growth and income.

Read more »

a man relaxes with his feet on a pile of books
Dividend Stocks

CPP Pensioners: Watch for These Important Updates

The CPP is an excellent tool for retirees, but be sure to stay on top of important updates like these.

Read more »

Technology
Dividend Stocks

TFSA Investors: 3 Dividend Stocks I’d Buy and Hold Forever

These TSX dividend stocks are likely to help TFSA investors earn steady and growing passive income for decades.

Read more »

four people hold happy emoji masks
Dividend Stocks

Love Dividend Growth? Check Out These 2 Income-Boosting Stocks

National Bank of Canada (TSX:NA) and another Canadian dividend-growth stock are looking like a bargain going into December 2024.

Read more »

An investor uses a tablet
Dividend Stocks

A Dividend Giant I’d Buy Over Enbridge Stock Right Now

Enbridge stock may seem like the best of the best in terms of dividends, but honestly this one is far…

Read more »