How TFSA Investors Can Earn an Average of $422/Month in Passive Income

TFSA and coins

Canadian investors can contribute a combined total of $88,000 to their Tax-Free Savings Account (TFSA). That is a massive amount of capital that you can use to generate passive dividend income tax-free!

Before you invest in a TFSA, confirm your contribution room

Now there are some rules to consider. TFSA contributions only begin accumulating from the year 2009 (if you were 18 years or older then), or the year that you turned 18 years of age, or became a resident of Canada. Contribution limits can vary from person to person.

Consequently, be careful to check with the CRA (Canada Revenue Agency) to see what your total TFSA contribution limit is before you start contributing large amounts. The CRA only tracks your contributions on an annual basis.

Keep track and be very careful to ensure you don’t over contribute. Over contributing to your TFSA can lead to some big penalties. The entire point of a TFSA is to accumulate wealth by paying no tax, so be aware of the rules to avoid fines and penalties.

Use your TFSA to grow your passive income streams

Say you contributed the entire $88,000 and are looking to earn passive income on that amount. Here is one hypothetical example of how you could earn an average of $400-plus per month of passive income by buying TSX dividend stocks today.

A top Canadian real estate stock

Dream Industrial REIT (TSX:DIR.UN) is one of Canada’s largest industrial property landlords. It also owns an attractive portfolio in Europe and operates two joint venture portfolios in Canada and the U.S.

Its assets are very well located in central locations. As a result, Dream has been enjoying exceptional rental rate growth. In its most recent quarter, it signed 1.4 million square feet of space at a 47% average spread to prior rents. That helped funds from operation (FFO) per unit (a key metric of profitability for real estate) to grow by 13% in the quarter.

Today, this TFSA stock yields 5.16%. It pays a $0.0583 distribution per unit every month. For a great quality portfolio of real estate and nice well-covered distribution, Dream Industrial is a good passive income stock for a TFSA.

A top Canadian energy infrastructure stock

If you are looking for a bigger dividend yield, Pembina Pipeline (TSX:PPL) is a good bet for a TFSA. Pembina is one of the energy infrastructure leaders in Western Canada. It calls itself a one-stop shop for energy production companies because of its mix of gathering/egress pipelines, processing/midstream assets, and marketing expertise.

Over 85% of its business is contracted and that largely supports its dividend. The company has a diversified business model that provides steady income. While this company does better when energy prices are elevated, it holds its own and supports its dividend in lower priced environments.

Pembina stock yields 6.5% today. It pays a $0.66745 per share quarterly dividend. For a steady-as-it-goes infrastructure stock, Pembina is a solid place for income in a TFSA.

The Foolish takeaway

Here at the Fool, we recommend a significantly more diversified portfolio than just two stocks. However, to demonstrate how much passive income you can earn today, let’s say you split your $88,000 of TFSA capital between these two stocks.

With an average yield of 5.75%, you would earn $5,064 of income annually. That averages out to $422 of passive income monthly.

Many Canadian dividend stocks are trading with outsized dividend yields today. You don’t need to start with $88,000 to begin investing. Just start with small amounts, save regularly, invest regularly, and re-invest your proceeds. You can build a substantial tax-free passive income portfolio sooner than you might even think possible.

COMPANYRECENT PRICENUMBER OF SHARESDIVIDENDTOTAL PAYOUTFREQUENCY
Dream Industrial REIT$13.693,214$0.0583$187.48Monthly
Pembina Pipeline$41.631,056$0.6675$704.88Quarterly
Stock prices as of August 28, 2023

The post How TFSA Investors Can Earn an Average of $422/Month in Passive Income appeared first on The Motley Fool Canada.

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Fool contributor Robin Brown has positions in Dream Industrial Real Estate Investment Trust. The Motley Fool recommends Dream Industrial Real Estate Investment Trust and Pembina Pipeline. The Motley Fool has a disclosure policy.

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