How to Use Your TFSA to Earn $2,111.52 Per Year in Tax-Free Income

Are you looking for TFSA income? Here’s one superior stock that could create massive amounts of passive income in the year ahead.

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Blocks conceptualizing Canada's Tax Free Savings Account

Source: Getty Images

Did you know that nearly 60% of Canadians have a Tax-Free Savings Account (TFSA)? This makes it one of the most popular ways to save and invest in the country! It’s like a financial best friend that lets your money grow without the worry of taxes eating away at your gains. Whether you’re saving for a vacation, a down payment, or just building a nest egg, the TFSA offers the flexibility to grow your funds tax-free.

But here’s a surprising stat: almost half of TFSA holders aren’t maxing out their contributions each year! With the annual limit now at $7,000 for 2024, that’s a lot of missed opportunity for tax-free growth. So, if you’re looking to get the most out of your savings, maxing out your TFSA could be a smart move to make the most of that valuable contribution room.

Why the TFSA is the best

Using a TFSA to create passive income is like having your cake and eating it, too, tax-free! By investing in dividend-paying stocks or other income-generating assets within your TFSA, you can build a steady stream of income without worrying about the taxman taking a bite. Whether you’re reinvesting those dividends to grow your portfolio or using them as extra cash flow, the beauty of a TFSA is that all the income earned stays completely tax-free.

But before you dive in, there are a few things to consider. First, remember that while the TFSA is super flexible, you still want to choose investments that align with your risk tolerance. Dividend stocks, real estate investment trusts (REITs), or even bonds can be great options. But they come with varying levels of risk. Also, keep an eye on your contribution limits. Over-contributing can lead to pesky penalties. If you play your cards right, your TFSA can become a powerful tool for generating passive income that grows over time, all without the tax hassle.

One stock to make major income

Whitecap Resources (TSX:WCP) is a solid choice for those looking to create passive income through their TFSA, thanks to its impressive dividend yield of 7%. This means for every dollar you invest, you’re getting a nice chunk of it back as cash flow, tax-free in your TFSA. The company’s strong financials, including a solid return on equity of 13.89% and a payout ratio of 55.37%, suggest that Whitecap not only has the ability to keep paying dividends. It might also have room to grow them in the future!

Moreover, Whitecap’s operational success, like its recent record production levels and robust funds flow, shows that the stock is well-positioned in the market. With the stock currently trading at a reasonable price-to-earnings (P/E) ratio of 8.34, it offers a compelling value for income-focused investors. If you’re looking to build a steady stream of passive income without the tax drag, Whitecap Resources could be a great addition to your TFSA.

Bottom line

So, now let’s say that you put that $7,000 towards WCP stock. You then see shares continue to climb by the same compound annual growth rate (CAGR) of the last five years at 23%! Add in that dividend yield, and here’s what your shares could look like.

COMPANYRECENT PRICENUMBER OF SHARESDIVIDENDTOTAL PAYOUTFREQUENCYPORTFOLIO TOTAL
WCP – now$10.27682$0.73$497.86Monthly$7,000
WCP – 23%$12.63682$0.73$497.86Monthly$8,613.66

By just continuing to perform at an average level, WCP stock could create $497.86 in dividends and $1,613.66 in returns. That’s total passive income of $2,111.52, or $175.96 monthly!

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 Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool recommends Whitecap Resources. The Motley Fool has a disclosure policy.

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