This year you can contribute $5,500 to your tax-free savings account (TFSA). If you have room left or amounts withdrawn from previous years, you can also add those amounts to your TFSA contribution room.
TFSAs are great for investing for tax-free income. Currently, there are opportunities to buy Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) at a yield of 4.6% and Telus Corporation (TSX:T)(NYSE:TU) at a yield of 4.5%. Both companies should continue to increase their dividends as they’ve done in the past.
Strong dividends
Both companies have paid dividends for a very long time. Bank of Nova Scotia has been paying a dividend since 1832, and Telus has been paying a dividend since 1916.
Bank of Nova Scotia has raised its dividend in 48 out of the last 50 years and it only froze it in 2009 and 2010 to be prudent in the aftermath of the financial crisis. The other big banks acted similarly.
Since then, Bank of Nova Scotia has raised its dividend for five consecutive years. The bank’s quarterly dividend is 5.9% higher than it was a year ago. With a payout ratio under 50%, the bank has the ability to maintain and grow its dividend.
Telus has raised its dividend for 12 consecutive years. The telecom’s quarterly dividend is 9.5% higher than it was a year ago. With a payout ratio under 70%, the telecom has the ability to maintain its dividend.
In fact, Telus is so confident about its growing earnings that it targets to grow its dividend by 7-10% in the near future.
Investing today
If you buy $2,750 in each of Bank of Nova Scotia and Telus today, using up your $5,500 TFSA capacity for the year, you can expect to earn about $250, or a yield of 4.55%, for the first full year.
Assuming Bank of Nova Scotia and Telus hike their dividends by more conservative rates of 5% and 8.5% per year, respectively, their average growth rate would be 6.75%.
So, in the second full year, investors can expect their investments to generate a passive income of about $266. And in the third year, they’d generate $284. In three years, you would have collected an income of $800.
Conclusion
Maximize your TFSA contributions every year by buying high-yield, dividend-growth stocks such as Bank of Nova Scotia and Telus, and your passive income stream will build quickly.
If you contribute $5,500 this year, next year, and the year after for the same starting yield of 4.55% and the same dividend-growth rate of 6.75%, you’ll generate an income of roughly $800 in the third year alone.
In fact, if you were 18 years old in 2009 and never contributed to a TFSA, you have $46,500 of contribution room. Investing that amount for a 4.55% yield would generate $2,115 of income for the first year!
The more you invest and the longer you hold quality dividend-growth stocks, the more income you get. Start building your passive income stream today.
