TFSA Investors: Invest $2,000 for +$1,513 in Income Every Year

Here’s a simple example with TD stock on saving and investing regularly for reliable passive income that’s tax free!

| More on:

This year, eligible Canadians can contribute $6,500 based on the Tax-Free Savings Account (TFSA) contribution limit. While it is best to take advantage of the entirety of the tax-free room, you only need to invest $2,000 per year for the next 15 years to earn at least $1,513 in annual income. To earn more than $1,513 per year you need to invest in solid dividend stocks that pay out safe dividends. Toronto-Dominion Bank (TSX:TD) is an excellent example.

Why invest in TD stock?

Toronto-Dominion Bank is a quality business that is able to make more profits over time. Simultaneously, it delivers solid long-term returns for its shareholders. For instance, in the past 10 years, it increased its share price and dividend by approximately 7.9% and 9.4%, respectively, per year.

Of course, the fact that the bank stock has dipped about 14% in the last 12 months makes it a good buying opportunity for long-term investment.

TD Chart

TD data by YCharts

Currently, investors can gobble up shares for a compelling dividend yield of 4.7% and discount of approximately 20% from the bank’s long-term normal valuation. That’s an awesome discount for the wonderful business with an S&P credit rating of AA-.

Invest $2,000 and earn $1,513 in passive income

YearTD stock price
(7.5% CAGR)
Contribution# shares boughtTotal sharesDividend per share
(9% CAGR)
Dividend income
2023$81.30$2,00024.6$3.84$94.46
2024$87.40$2,00022.947.5$4.19$198.75
2025$93.95$2,00021.368.8$4.56$313.76
2026$101.00$2,00019.888.6$4.97$440.47
2027$108.57$2,00018.4107.0$5.42$579.96
2028$116.72$2,00017.1124.1$5.91$733.40
2029$125.47$2,00015.9140.1$6.44$902.06
2030$134.88$2,00014.8154.9$7.02$1,087.33
2031$145.00$2,00013.8168.7$7.65$1,290.73
2032$155.87$2,00012.8181.5$8.34$1,513.91
Invest $2,000 every year and earn $1,513 in passive income in 10 years.

You don’t even need to use up your $6,500 TFSA limit to get decent passive income rolling in. Based on the scenario illustrated in the above table, you’re investing $2,000 at the start of each year to get the quarterly dividends for the rest of the year.

The first $2,000 buys you 24.6 TD shares and brings in $94.46 of dividend income for the year. The scenario assumes the TD stock price grows at a compound annual growth rate (CAGR) of 7.5%. You can see that by investing the same amount (of $2,000), you’re buying a lower number of shares over time because the stock is worth more over time. If the company continues to grow its dividend by 9% annually, by the 10th year, you own 181.5 shares that produces you $1,513.91 in passive income. 

In fact, if we were to continue the projection, even if you don’t buy more shares after 10 years, you can expect to earn more and more passive income from your TD holding if the stock continues to increase its dividend.

If you had invested $6,500 instead each year in the stock, you would make $4,920.21 in annual passive income by 2032. However, you’d want to build a diversified TFSA portfolio to spread your risk across a group of stocks that you expect will become more profitable over time, which is why the example uses $2,000.

Limitations of the TD stock example

There’s a limitation in the TD stock example. It assumes a CAGR. However, in reality, stocks are volatility. Stock prices can be down one year and up much more the next. Their dividends don’t grow smoothly at a specific rate either. Moreover, it’d be easier to save and invest $166.67 per month instead to add up to $2,000 a year with commission-free platforms like Wealthsimple.

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.

Fool contributor Kay Ng has positions in Toronto-Dominion Bank. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

More on Dividend Stocks

hand stacks coins
Dividend Stocks

This 7.7 Percent Dividend Stock Pays Cash Every Single Month

This TSX income stock has been paying above-average yields for decades now.

Read more »

investment research
Dividend Stocks

Best Stock to Buy Right Now: TD Bank vs Manulife Financial?

TD and Manulife can both be interesting stock picks for today, depending on your investment style.

Read more »

A worker gives a business presentation.
Dividend Stocks

2 Dividend Stocks to Double Up on Right Now

These stocks are out of favour but could deliver nice returns over the coming years.

Read more »

Man holds Canadian dollars in differing amounts
Dividend Stocks

This 5.5 Percent Dividend Stock Pays Cash Every Month

This defensive retail REIT could be your ticket to high monthly income.

Read more »

Confused person shrugging
Dividend Stocks

Passive Income: How Much Do You Need to Invest to Make $600 Per Month?

Do you want passive income coming in every single month? Here's how to make it and a top dividend ETF…

Read more »

Canadian Dollars bills
Dividend Stocks

3 Monthly-Paying Dividend Stocks to Boost Your Passive Income

Given their healthy cash flows and high yields, these three monthly-paying dividend stocks could boost your passive income.

Read more »

Make a choice, path to success, sign
Dividend Stocks

The TFSA Blueprint to Generate $3,695.48 in Yearly Passive Income

The blueprint to generate yearly passive income in a TFSA is to maximize the contribution limits.

Read more »

hand stacks coins
Dividend Stocks

3 Ultra-High-Yield Dividend Stocks You Can Buy and Hold for a Decade

These three high-yield dividend stocks still have some work to do, but each are in steady areas that are only…

Read more »