Wouldn’t it be incredible if you could earn tax-free income by merely parking your money somewhere and making it work for you? If you are willing to make a smart money move and use your Tax-Free Savings Account (TFSA), I can tell you about one play that can help you earn more than $1,000 in passive annual income.
The TFSA is an account type that gives you the ability to grow your investments and be able to withdraw funds from the account whenever you want — without any taxes!
It is the best tax-sheltered account introduced by the Canadian government to encourage Canadians to save more money. You can use your TFSA’s tax-sheltered status to earn tax-free income. Opening a TFSA is just part of the play. Choosing the right stock to allocate your TFSA contribution room for is the real deal.
The best way to maximize potential passive income from your TFSA is to use the contribution in reliable dividend-paying stocks with an excellent yield.
High-yield dividend payers
A dividend-paying stock can provide you regular passive income. Typically, dividend stocks pay around 2-5% to shareholders every year. It is a decent way to use your surplus cash instead of only letting it sit idle as cash in a savings account.
Some companies pay shareholders at more substantial dividend yields. Higher dividend yields could be tricky if the underlying company does not have solid fundamentals to support higher payouts. Historically, many companies with ultra-high dividend yields cut payouts to shareholders.
There are some companies with high yields that do not come with the same risks. Some companies have perfect business models to support high dividend yields. Enter Inter Pipeline (TSX:IPL) — a dividend-paying stock poised as an ideal buy right now.
Inter Pipeline is an energy sector player trading on the Toronto Stock Exchange. It has been able to expand faster than expectations by focusing on oil sands projects. Its management has outlined $3.7 billion in capital opportunities for the company. About $2.3 billion of that is going to come from its oil sands operation.
Currently, it is in the midst of its most ambitious growth projects to date. It is spending $3.7 billion on the Heartland Petrochemical Complex. The plant, when it becomes operational, will be able to process 525 kilotons of polypropylene each year. If successful, Heartland can add around $500 million in annual EBITDA for Inter Pipeline’s bottom line.
Earning tax-free requires making smart investments. Purchasing income-generating assets and holding them in your TFSA can allow you to earn passive income entirely tax-free.
At writing, the stock trades for $20.11 per share, and it offers shareholders a mouthwatering dividend of 8.50%. If you purchase $15,000 worth of Inter Pipeline shares and store the asset in your TFSA, you can earn $1,275 each year through its dividends alone.
I think allocating $15,000 to the IPL stock in your TFSA could help you get an excellent start to building a high-income TFSA portfolio.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Adam Othman has no position in any of the stocks mentioned.