The TFSA (Tax-Free Savings Account) is a popular registered account in Canada due to the flexibility it offers. Specifically, the TFSA is a tax-sheltered account where you can allocate a portion of your savings each year to buy qualified investments, including stocks, bonds, mutual funds, and exchange-traded funds.
The TFSA contribution limit is increased each year, which is indexed to inflation. For 2023, the TFSA limit is $6,500, while the cumulative contribution room stands at $88,000. But you can also carry forward any unused contribution room from previous years and create a steady stream of passive income by holding quality dividend stocks in the TFSA.
Let’s see how you can earn over $500 in tax-free dividends each year with a TFSA investment of $15,000.
Enbridge stock
One of the largest companies in Canada, Enbridge (TSX:ENB) currently pays shareholders an annual dividend of $3.55 per share, translating to a yield of 7.5%. It has a pipeline network of 17,8000 miles spanning across North America, making Enbridge one of the largest pipeline operators globally.
Enbridge recently announced plans to acquire three natural gas utilities from Dominion Energy for a substantial sum of $14 billion. Investors were not too happy with the news, driving ENB stock price lower in recent trading sessions.
Enbridge would have to fund a portion of the acquisition with debt, resulting in higher interest expense for the company. But the deal will make Enbridge the largest natural gas utility company in North America, driving future cash flows higher.
Enbridge’s CEO Greg Ebel explained, “Adding natural gas utilities of this scale and quality, at a historically attractive multiple, is a once-in-a-generation opportunity.”
In Q2 2023, Enbridge’s distributable cash flows (DCF) stood at $2.8 billion, and it expects to end the year with a DCF per share of $5.25, indicating a payout ratio of less than 70%, which is sustainable. Enbridge has the flexibility to reinvest in growth projects, reduce balance sheet debt, and increase dividends over time, something it has done for 28 consecutive years.
Priced at 16.4 times forward earnings, ENB stock is quite cheap and trades at a discount of 20% to consensus price target estimates.
Manulife stock
Manulife (TSX:MFC) is a diversified financial giant that provides life insurance and wealth management solutions in Canada, the U.S., and Asia. It is among the three largest life insurance companies in Canada and ended 2022 with $1.4 trillion in assets under management.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY |
| Enbridge | $46.98 | 160 | $0.8875 | $142 | Quarterly |
| Manulife | $26.35 | 285 | $0.365 | $104 | Quarterly |
Due to the stability of its cash flows, Manulife pays shareholders an annual dividend of $1.46 per share, indicating a yield of 5.6%. These payouts have risen by 10% annually since 2013, showcasing the resiliency of the company’s business model. With a payout ratio of less than 20%, investors can expect dividend hikes to continue in the future as well.
Priced at 7.1 times forward earnings, analysts expect Manulife to increase EPS (earnings per share) by almost 12% each year in the next five years. The TSX stock also trades at a discount of 12% to consensus price target estimates.
The Foolish takeaway
An investment of $15,000 distributed equally between the two TSX stocks will help investors earn close to $1,000 in annual dividends. If dividends increase by 7% each year, your payout will double in the next decade.
