TFSA Investors: Buy These 3 Stocks for $3,480 Yearly Tax-Free Income

One significant benefit of a TFSA-based dividend income is that it doesn’t weigh down your tax bill.

| More on:
TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.

Source: Getty Images

One significant benefit of starting a Tax-Free Savings Account (TFSA)-based passive-income stream is that it doesn’t weigh down your tax bill. No matter how generous of an income you can create from this account, it’s all yours, and the government cannot take a dime. The only limitation is the one associated with the account itself — i.e., its contribution room.

The TFSA contribution room is significantly lower than its tax-sheltered peer Registered Retirement Savings Plan (RRSP). One logical way to circumvent this limitation is to choose the right dividend stocks.

A power generation company

Capital Power (TSX:CPX) is an Edmonton-based power generation company with a diverse portfolio of assets spread out in Canada and the United States. The power generation capacity is split equally between the two countries, although a higher segment of the adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) comes from Canada (60%).

The company is still heavy on traditional power generation sources (fossil) and has a total of 19 facilities with a generation capacity of 7.8 gigawatts (GW). Renewables capacity, in comparison, is 1.49 GW (mostly wind).

This mix hasn’t harmed the company’s performance, and even though the stock has slumped multiple times in the last five years, the overall direction has remained up, and it returned over 60% in that period. It’s also offering dividends at a healthy yield of about 5.1%.

If you park $20,000 in the company now, you can start a passive income of about $85 a month ($1,020 a year), and your capital may grow to $32,000 in the next five years.

A bank

Canadian bank stocks are among the most popular dividend picks in the TSX. All six major banks are Dividend Aristocrats with stellar histories. This includes Bank of Nova Scotia (TSX:BNS), which is recognized as the second-oldest dividend-paying institution in the country. The bank is currently trading at a discount of about 21%.

This has pushed the bank’s yield to 5.8%. If you invest $20,000 in the bank stock, you can start a monthly income of about $96 ($1,160 a year). The discount might also lead to decent capital appreciation once the stock goes bullish again, and even though its recent history indicates otherwise, the bank may offer decent growth potential in the long term.

An energy stock

When it comes to dividend payers from the energy sector, one stock most investors either have or seriously consider in Canada is Enbridge (TSX:ENB).

It’s one of the oldest Aristocrats in the energy sector with 29 consecutive years of dividend growth. The growth used to be quite ambitious in the past, but the company wisely made the decision to keep it to a reasonable level, which may ensure many more decades of dividend growth for this energy giant.

It’s offering a juicy yield of about 6.5%. So, if you buy $20,000 worth of Enbridge stock, you may start generating about $108 ($1,300 a year) in passive income every month.

Its business model that focuses on energy transportation (via pipelines) instead of extraction makes it less vulnerable to energy price fluctuations. However, the flip side is that it may also lag behind when the rest of the sector is bullish.

Foolish takeaway

Collectively, the three stocks can help you generate a passive income of about $3,480 a year if you invest $60,000 in them, split equally.

All three companies are among the leaders in their respective sectors and have stable business models and stellar histories. So, they offer a healthy combination of reliability and return potential.

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 Adam Othman has no position in any of the stocks mentioned. The Motley Fool recommends Bank Of Nova Scotia and Enbridge. The Motley Fool has a disclosure policy.

More on Dividend Stocks

open vault at bank
Dividend Stocks

Don’t Get Cute; Just Buy Stability: Top Defensive TSX Stocks to Buy Now

A healthy risk tolerance is essential for most investors, but many stray from the tried and tested, hoping to find…

Read more »

Canadian dollars in a magnifying glass
Dividend Stocks

3 High-Yield Dividend Stocks That Are Screaming Buys Right Now

Are you looking for great income stocks? Here's a trio of high-yield dividend stocks that pay insane yields right now.

Read more »

Piggy bank with word TFSA for tax-free savings accounts.
Dividend Stocks

Transform a $5,000 TFSA Into a $50,000 Retirement Nest Egg

The TFSA is a powerful tool that can grow a small investment into a substantial retirement nest egg over time.

Read more »

A meter measures energy use.
Dividend Stocks

Is Fortis Stock a Buy, Sell, or Hold for 2025?

Fortis has increased its dividend annually for the past five decades.

Read more »

analyze data
Dividend Stocks

3 Dividend Stocks That Are Screaming Buys in November

Here are three top dividend stocks long-term investors won't want to ignore during this part of the market cycle.

Read more »

senior relaxes in hammock with e-book
Dividend Stocks

Generate $175/Month in Passive Income With a $30,000 Investment

Dividend aristocrats offer reliability, and many of them also offer generous yields. With sizable enough discounts, these yields can become…

Read more »

dividends can compound over time
Dividend Stocks

Best Dividend Stocks to Buy Now for Canadian Investors

These three stocks would be excellent additions to your portfolios, given their solid underlying businesses, consistent dividend growth, and healthy…

Read more »

data analyze research
Dividend Stocks

3 Undervalued Stocks to Watch in November

Not all undervalued and discounted stocks are destined or poised to make a comeback soon, and a protracted timeline can…

Read more »