TFSA Investors: How to Earn $250 a Month in Tax-Free Dividends

Investors can turn their $63,500 in max cumulative TFSA contribution room into a reliable, tax-free income stream.

| More on:

One of the most attractive aspects of dividend investing is that it allows you to substitute or boost your income. From millennials to retirees, a solid dividend portfolio can benefit any lifestyle.

In Canada, we are lucky to have one of the best investment vehicles in the world. The Tax-Free Savings Account (TFSA) enables Canadians to grow their investments tax-free. Not only can they grow their investments, but any income received from investments held within the account — dividends, interest payments, etc. — are also tax-free.

It is one of the most underutilized ways to build wealth. Canadians who were at least 18 years of age in 2009 when the TFSA was first introduced now have a cumulative maximum of $63,500 in TFSA contribution room.

To build a portfolio that will generate $250 a month in tax-free dividends, investors would need $3,000 in annual income. As such, a $60,000 portfolio yielding 5% would do the trick.

Now that we have a starting point, it is time to shortlist our investments. Not all stocks yielding 5% are created equal, and one of the best places to start is the Canadian Dividend Aristocrat list. These are companies that have a history of raising dividends for at least five or more consecutive years.

Why Aristocrats? They have shown a commitment to rewarding investors through a growing and sustainable dividend. From here, we are interested in looking at companies from a variety of industries and whose dividends are considered safe.

Inter Pipeline (TSX:IPL) is one company that checks off all the boxes. In an environment of low interest rates, companies with high capital expenditures, such as midstream companies, perform quite well. It is the perfect time to take on big projects — such as Inter’s Heartland petrochemical plant.

The first of its kind in Canada, Heartland is expected to enter operation in late 2021. It will contribute significantly to EBITDA to the tune of $400-$450 million annually, which will enable it to build on its 10-year dividend-growth streak. Inter Pipeline currently yields a hefty 7.06% and is well covered by cash flows (61%).

You can’t talk about building a portfolio of dividend-paying stocks without talking about Canada’s big banks. They are a staple among Canadian portfolios, and it’s not hard to see why. They own some of the longest uninterrupted dividend streaks in Canada. Although they all lost their dividend-growth streaks during the financial crisis, not a single one cut the dividend.

The best yield and growth combination belongs to Bank of Nova Scotia (TSX: BNS)(NYSE: BNS). The bank has an eight-year dividend-growth streak and just raised dividends by another 3.4% earlier this week. It currently yields 5.08% and has not missed a payment since it first started paying dividends back in 1892.

The last stock to consider is Exchange Income (TSX: EIF). Exchange Income is an aerospace and aviation company that offers airline, charter, and emergency medical services across the country.

This monthly dividend payer also offers a dividend-reinvestment plan (DRIP), which gives shareholders the opportunity to reinvest shares at a 3% discount. It currently yield’s 5.88% and has an eight-year dividend-growth streak in which it has averaged mid-single-digit growth.

Foolish takeaway

A $120,000 investment in any combination of these companies would generate at least $250 a month. In fact, if you were to split the portfolio equally among all three, then you would be generating approximately $300 a month in tax-free dividends. Building wealth doesn’t have to be hard.

Fool contributor Mat Litalien owns shares of INTER PIPELINE LTD. Bank of Nova Scotia is a recommendation of Stock Advisor Canada.

More on Dividend Stocks

Person holds banknotes of Canadian dollars
Dividend Stocks

4 Canadian Stocks I’d Load Into My TFSA Without Hesitation

These Canadian stocks offer reliable income and have the potential to deliver solid capital gains, making them to bets to…

Read more »

earn passive income by investing in dividend paying stocks
Dividend Stocks

The Dividend Stocks That Pay You While You Sleep

Are you looking for stocks that you can depend on for predictable passive income. These three dividend stocks are safe…

Read more »

coins jump into piggy bank
Dividend Stocks

This TSX Stock Yields More Than the Average Savings Account Today

Income-focused investors can start researching Enbridge stock on this dip for a potential buy for higher income for long-term capital.

Read more »

frustrated shopper at grocery store
Dividend Stocks

Inflation Eating Your Savings? This Stock Fights Back

For Canadians with a long-term investment horizon, Brookfield Infrastructure is a solid stock to potentially buy on dips and hold…

Read more »

Dividend Stocks

This 5% Dividend Stock Could Be the Ultimate Retirement Hack

This 5% dividend stock offers growing income backed by essential infrastructure assets, making it an intriguing option for retirement portfolios.

Read more »

A train passes Morant's curve in Banff National Park in the Canadian Rockies.
Dividend Stocks

This Isn’t a “Quick Win” Stock: It’s a “Steady Builder” One

CN Rail (TSX:CNR) may be the steadiest compounder on the entire Canadian stock market.

Read more »

dividend growth for passive income
Dividend Stocks

1 Undervalued Canadian Dividend Stock to Buy Now and Hold for Decades

This stock is down 15% from the recent highs and now offers an attractive dividend yield.

Read more »

House models and one with REIT real estate investment trust.
Dividend Stocks

Here’s the 6.8% Dividend Stock I Keep Coming Back To

SmartCentres REIT (TSX:SRU.UN) stands out as a near-7% yield dividend play that's worth coming back to for yield.

Read more »