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How to Earn Big Income From Your TFSA Without Sacrificing Capital Appreciation

Your TFSA is your vehicle to financial freedom — your means to get to the light at the end of the tunnel; your gravy train to ride on in retirement — and it’s arguably the best way to build wealth over the long haul. It’s a powerful investment vehicle indeed, and funds within it shouldn’t be speculated with, as one TFSA dollar is worth way more than a dollar in any of your non-registered accounts.

I hate to sound glib, and I hate repeating myself, but the TFSA has the potential to become a life changer if appropriately used. The power of tax-free dividend reinvestment is both unfathomable and profound, and I’m not using these words lightly. If you do have a long-term investment horizon, all you need to do is the math, and you’ll begin to understand what the TFSA is truly capable of.

While the added value of a TFSA dollar over a non-registered dollar is unquantifiable, I’m sure you’d agree that penny stocks, speculation, and questionable assets like Bitcoin have no place in a TFSA. It’s meant for your best-of-the-best ideas over the long term. And while it can be used as a provider of income (with dividend stocks) or a growth vehicle to accelerate your retirement plans, many investors should realize that there’s a middle ground, and it’s this middle ground that may be the best option for most investors.

We want big monthly income, but at the same time, we also want growth, which acts as a hedge against inflation. As someone wise once said with regards to businesses: “If you’re not growing, you’re dying,” and the same can be said of holdings within a TFSA.

Fortunately, you can get a generous payout today without surrendering all (or most) of the growth you could have had with a lower-yielding portfolio.

Consider Northland Power  (TSX:NPI), an underrated renewable power producer with a respectable 5% dividend yield, and a magnitude of growth that will likely be sustainable throughout decades.

The renewables are magnificent plays to get both income and growth, offering the perfect blend for dividend-savvy TFSA investors who want the income but still want to see some stock price appreciation and dividend growth. The reason I like Northland Power over the numerous other renewable options out there on the TSX is primarily due to the stock’s valuation, which I believe is overly depressed given the fairly predictable nature of growth projects that are in the pipeline (and on the horizon).

Fellow Fool Ryan Vanzo recently shed light on Northland Power, highlighting the fact that the company’s management team has been eating their own cooking, with 34% ownership in outstanding shares of NPI. Moreover, Vanzo also criticized the excess skepticism that Northland Power’s management had faced as a relatively less-regulated utility.

I think Vanzo is right on the money with Northland Power and its management team, who don’t get the respect they deserve. They’re doing all the right things and they’ve got a realistic albeit ambitious long-term growth plan, and with EBITDA expected to grow 60% by 2026, long-term investors should be all over the stock while they’re in ridiculously cheap territory.

The stock trades at 16.3 times trailing earnings and just 2.9 times sales, both of which are lower than the company’s historical average multiples of 20.1 and 3.7, respectively. The discount is absurd when you consider the 30.6% in annual top-line growth posted over the last five years.

Stay hungry. Stay Foolish.

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Fool contributor Joey Frenette has no position in any of the stocks mentioned.

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