How to Use Your TFSA to Earn $5,000 Per Year in Tax-Free Income

The TFSA (Tax-Free Savings Account) allows Canadians above 18 years to earn tax-free earnings on a specified amount called a contribution limit. For 2024, the Canadian Revenue Agency has fixed the contribution limit to $7,000, while the cumulative value for individuals who were 18 years and older in 2009 would be $95,000. So, if you invest the entire amount in quality dividend stocks that offer over 5.3% dividend yield, you can earn over $5,000 annually.

Against this backdrop, let’s look at three top stocks that offer over 5.3% dividend yields.

Enbridge

Enbridge (TSX:ENB) is a must-buy for income-seeking investors due to its impressive track record, solid underlying businesses, and healthy growth prospects. The midstream energy company earns around 98% of its cash flows from regulated cost-of-service and long-term, take-or-pay contracts, thus shielding its financials from market volatility. Also, around 80% of its EBITDA (earnings before interest, tax, depreciation, and amortization) is inflation-indexed. Supported by these stable and predictable cash flows, the company has paid dividends for 69 years. It has also raised its dividends for 29 previous years at an annualized rate of above 10%, while it currently offers a healthy forward dividend yield of 6.62%.

Meanwhile, Enbridge acquired Public Service Company, a natural gas utility that served 600,000 customers in North Carolina, from Dominion Energy earlier this month. The company continues to expand its midstream, renewable, and utility asset bases through annual spending of $6-$7 billion. The company’s financial position also looks healthy, with its debt-to-EBITDA ratio at 4.7 and $18 billion of liquidity as of June 30.

Bank of Nova Scotia

Bank of Nova Scotia (TSX:BNS) has paid dividends continuously since 1833. It has raised its dividends at a CAGR (compound annual growth rate) of 6% since 2013 and currently offers a healthy forward dividend yield of 5.93%. The financial services company reported an excellent third-quarter performance in August, with quarter-over-quarter revenue and adjusted net income growth. It has also strengthened its balance sheet.

Its common equity tier-one ratio, which determines the company’s capacity to withstand financial distress, improved by 10 basis points to 13.3% compared to the previous quarter. Further, the company has signed an agreement to acquire a 14.9% stake in KeyCrop. The company’s management hopes the acquisition will enhance its near-term profitability while growing and diversifying its United States business. Given its improving financials and healthy growth prospects, I expect BNS to continue paying dividends at a healthier rate.

Telus

After a tough couple of years, telecom companies are witnessing healthy buying amid rate cuts by central banks across Canada and the United States. Telus (TSX:T), one of the three top players in Canada, is up 11% from its July lows. Telecom companies enjoy healthy cash flows due to their recurring revenue sources, thus allowing them to reward their shareholders with consistent dividend growth. Since 2004, the company has returned $21 billion to its shareholders, with $21 billion in dividends and $5.2 billion through share repurchases. It currently offers a quarterly dividend of $0.3891/share, translating into a forward yield of 6.97%.

Meanwhile, the demand for telecommunications services is rising in this digitally connected world. Telus is investing in strengthening its 5G and broadband infrastructure, which could continue to grow its customer base and ARPU (average revenue per user). Its 5G network currently covers 86% of the country’s population. Its other growth verticles, such as Health and Agriculture & Consumer goods, could boost its financials in the coming quarters. Meanwhile, the company’s management is confident of raising its dividends by 7-10% annually through 2025, making it an excellent buy for income-seeking investors.