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Question: What does it take to turn a TFSA into an income-producing powerhouse, when the annual contribution limit is just $6,000?
At first, it looks like an intractable problem. $6,000 a year only adds up to a $60,000 nest egg after 10 years of saving, and while TFSA contribution room accumulates every year you’re eligible to open one, that’s little consolation if you’re 20 or younger.
The average yield on TSX stocks is 2.7%, meaning that a $6,000 portfolio will pay you just $162 a year initially. For most people, that’s not even beer money, let alone a major help toward a savings goal.
So, if you want to turn your TFSA into a cash cow while respecting the contribution limit, you’ll need to get creative. Over-contributing is out, since that will hit you with a 1% a month tax. Gambling on risky, volatile stocks is also out, unless you’re prepared to lose it all.
Buying high-yield stocks, however, may actually work. Stocks with steady income and above-average yields can pay you dividends you can count on no matter what the market does. Not only that, but if they raise their dividends over time, the yield on cost may reach an incredibly high level.
To get straight to the point, here’s one stock that may fit the bill.
TransAlta Renewables (TSX:RNW)
TransAlta is an energy company that operates 21 wind turbines, 13 hydroelectric facilities, a solar facility, and a natural gas pipeline system. The company is highly diversified, which spares it the dependence on oil prices that can prove problematic for many energy stocks. More to the point, it has been doing well lately, posting revenue of $140 million and EPS of $0.35 in its most recent quarter, making it a dependable income producer in an industry where losing quarters are frequent.
A clean energy play
For ethical investors, TransAlta is a dream come true. As a pioneer in the clean energy revolution, it focuses mainly on eco-friendly sources like solar, wind, and hydro. The company does have an LNG business, which may not sound “green” but can be considered environmentally protective to the extent that it replaces coal.
An ultra-high dividend
Now we get to the most important part: the dividend.
TransAlta pays a distribution of $0.078 per month, which works out to $0.98 per year. At current prices, that gives us a yield of around 7%. That means that even a $6,000, one-year TFSA contribution invested in TransAlta can pay you $420 a year, while a $60,000 portfolio can pay you $4,200 a year. Assuming TransAlta’s yield stays the same, it would only take 10 years of sacking away a few grand each year to get to a point where the stock was paying you a nice tax-free bonus each and every year. And if we see some dividend growth in the years ahead, you’ll really be laughing.
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Fool contributor Andrew Button has no position in any of the stocks mentioned.