Utilizing your TFSA to buy income-generating stocks can be a great way to compound your savings and investments while saving on the taxes. All it requires is building a solid portfolio of dividend-paying stocks that are reliable and can be expected to grow over time.
The current maximum contribution room for the TFSA is $69,500, so in order to make $250 a month, or $3,000 a year in dividends, investors will need to build a portfolio with an average yield of at least 4.3%. That 4.3% yield is not all that high, and investors can find a number of quality stocks today that will average out to at least that.
Three dividend-paying stocks that are reliable and will continue to grow their distributions are Pembina Pipeline (TSX:PPL)(NYSE:PBA), Emera (TSX:EMA) and Choice Properties REIT (TSX:CHP.UN).
Pembina Pipeline
Pembina is a major energy transportation and infrastructure company. It’s one of the largest pipeline operators and third-party gas processors in Western Canada, on pace to have pipeline capacity of roughly 3.2 million barrels of oil equivalent per day and 6.1 billion cubic feet per day of gas processing capacity.
It’s a great company for investors because its cash flow is highly stable, with roughly 85% of its earnings before interest taxes depreciation and amortization (EBITDA) coming from fee-based contributions. This allows it to payout a considerable amount of its earnings while retaining some to invest in more growth, which it uses to grow the dividend.
Over the last five years, the dividend has increased by 40%, or a compounded annual growth rate (CAGR) of 6.96%. That’s why Pembina is one of the top Canadian Dividend Aristocrats and a perfect long-term dividend stock.
Plus, you can gain exposure today at a price-to-earnings ratio of just 16.4 times and a dividend that’s yielding roughly 4.95%.
Emera
Emera is a utility company operating in the United States, Canada, and the Caribbean. The company is an electricity and gas company with more than 50% of its rate base located in Florida. Because it’s a utility, nearly all of its revenue is regulated, adding an extra layer of stability to its cash flows.
The company has a major $6.9 billion growth plan it’s undertaking over the next three years to grow its rate base by roughly 7%. The new growth will help to fund the dividend that continues to grow, which has been increased by 48% since 2015, or a CAGR of 8.1%.
Emera too is a Dividend Aristocrat and has a target to grow its dividend between 4% and 5% until at least 2022.
You can gain exposure today at a price to earnings of roughly 20 times and a yield of approximately 4.1%.
Choice Properties
Choice Properties REIT owns a portfolio of mostly retail properties across Canada.
When most people hear retail, they may think businesses that are at high risk of going bust, or an industry with a lot of turnover. Choice Properties, however, is a quality long-term investment because of its strong tenant base.
Its tenants are made up of staples in the economy, such as banks, grocery stores, and drug stores. In fact, more than 50% of its revenue comes from Loblaw alone, one of the largest consumer staples in Canada.
The company has increased its dividend by roughly 14% since 2015, or a CAGR 2.63%, slightly less than the other two, but its dividend remains just as strong.
The stock yields more than 5%, so investors should look to take advantage of the attractive yield today.
Bottom line
If you stick to quality dividend-paying companies like these, especially ones that will grow their dividends, then over time, not only will your $250 a month be reliable, but you will soon see it grow.
These three companies have a combined average yield of 4.68%, meaning if you could replicate your portfolio investing in similar companies that total a 4.68% average yield, you would be earning roughly $3,250 a year, or more than $270 a month on $69,500 in contributions, plus you could expect that $3,250 to grow each year.
Before you know it, through the power of compounding you could be seeing double that $270 or more every month.
So, look to build a high-quality portfolio as soon as you can to start growing and compounding your wealth as soon as possible.
