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The Tax-Free Savings Account (TFSA) is arguably one of the best ways to create income — especially if you’re looking to create passive income over the years. It can be very tempting to see dividends come in and spend that cash. But if you’re using a TFSA, I’d argue another approach.
Instead of using that passive income each month, quarter, or year to buy something fun, reinvest! By reinvesting, you can even get as much as $10,000 in passive income annually. Let’s find out how.
First, see how much you can afford
If you wanted to create $10,000 in passive income each year off the bat, it would take an incredibly large investment. Because of this, a far easier solution is to invest slowly. You simply need to see what you can afford and drip feed into an investment year after year.
By doing this slowly over time, reinvesting your dividend income as you go, you can end up investing less but making more! Of course, you’ll need to choose the right stock.
A long-term income stock
If you want passive income that’s bound to last, I would look at dividend stocks that have been doing this a while now. A great option is the Big Six banks, such as Toronto-Dominion Bank (TSX:TD). TD stock has been around for decades, growing substantially in that time. That growth hasn’t slowed in the years that followed, as it continues to be one of the top 10 banks in America as well!
Further, TD stock has expanded into wealth and commercial management, offers multiple loan repayment options for clients, and created lucrative credit card partnerships. All to say it will continue to increase dividends for years to come.
How much could that be? TD stock currently offers a dividend yield at 4.75%. That comes out at $3.84 annually, dished out on a quarterly basis. In the last decade, the dividend has increased by 137%! That’s a compound annual growth rate (CAGR) of 9% as of writing.
Look to the future
Let’s look at the share performance to see how long it could take you to reach that $10,000 goal in annual passive income. TD stock has grown 92% in the last decade — a CAGR of 6.78% as of writing. Based on this information, even after a dip, we can calculate how long it would take to drip feed into this stock for $10,000 compared to what it would cost to achieve that today. First, let’s look at today.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND (ANNUAL) | TOTAL PAYOUT (ANNUAL) | FREQUENCY | TOTAL INVESTMENT |
| TD | $79.47 | 2,604 | $3.84 | $10,000 | Quarterly | $206,939.88 |
That’s an insanely high price tag for $10,000, wouldn’t you agree? Now, let’s see what would happen if you drip feed into TD stock, starting with $6,000 and adding $3,000 each year.
| Year | Shares Owned | Annual Dividend Per Share | Annual Dividend | Compound Frequency | After DRIP Value | Annual Contribution | Year End Shares Owned | Year End Stock Price | New Balance |
|---|---|---|---|---|---|---|---|---|---|
| 1 | 76.00 | C$3.78 | C$287.00 | Quarterly | C$6,334.15 | C$3,000.00 | 114.75 | C$84.96 | C$9,749.23 |
| 2 | 114.75 | C$4.12 | C$472.32 | Quarterly | C$10,230.20 | C$3,000.00 | 153.09 | C$90.80 | C$13,899.97 |
| 3 | 153.09 | C$4.49 | C$686.83 | Quarterly | C$14,599.64 | C$3,000.00 | 191.21 | C$97.04 | C$18,554.56 |
| 4 | 191.21 | C$4.89 | C$935.10 | Quarterly | C$19,507.48 | C$3,000.00 | 229.33 | C$103.70 | C$23,782.18 |
| 5 | 229.33 | C$5.33 | C$1,222.44 | Quarterly | C$25,028.39 | C$3,000.00 | 267.64 | C$110.83 | C$29,662.22 |
| 6 | 267.64 | C$5.81 | C$1,555.07 | Quarterly | C$31,248.14 | C$3,000.00 | 306.36 | C$118.44 | C$36,285.93 |
| 7 | 306.36 | C$6.33 | C$1,940.24 | Quarterly | C$38,265.43 | C$3,000.00 | 345.70 | C$126.58 | C$43,758.27 |
| 8 | 345.70 | C$6.90 | C$2,386.43 | Quarterly | C$46,193.95 | C$3,000.00 | 385.89 | C$135.27 | C$52,200.14 |
| 9 | 385.89 | C$7.52 | C$2,903.56 | Quarterly | C$55,164.83 | C$3,000.00 | 427.14 | C$144.57 | C$61,750.98 |
| 10 | 427.14 | C$8.20 | C$3,503.27 | Quarterly | C$65,329.49 | C$3,000.00 | 469.72 | C$154.50 | C$72,571.78 |
| 11 | 469.72 | C$8.94 | C$4,199.22 | Quarterly | C$76,863.00 | C$3,000.00 | 513.88 | C$165.11 | C$84,848.68 |
| 12 | 513.88 | C$9.74 | C$5,007.45 | Quarterly | C$89,968.04 | C$3,000.00 | 559.90 | C$176.46 | C$98,797.14 |
| 13 | 559.90 | C$10.62 | C$5,946.84 | Quarterly | C$104,879.57 | C$3,000.00 | 608.06 | C$188.58 | C$114,666.93 |
| 14 | 608.06 | C$11.58 | C$7,039.64 | Quarterly | C$121,870.31 | C$3,000.00 | 658.69 | C$201.53 | C$132,747.93 |
| 15 | 658.69 | C$12.62 | C$8,312.10 | Quarterly | C$141,257.25 | C$3,000.00 | 712.12 | C$215.38 | C$153,377.03 |
And there you have it. After just 15 years, with a reasonable amount of investing, you can achieve $10,000 in annual passive income! Plus, you’ll have a $153,377 portfolio. All from investing a total of $51,000 in that time compared to about $207,000!
