Unlike an RRSP, an investment tool designed exclusively for growing retirement nest eggs (though it can be put to other uses), a Tax-Free Savings Account (TFSA) is much more flexible. You can use it for your short term-financial goals as well as long-term interest-free capital growth.
It’s also very well suited to passive income generation through dividend stocks. And the best part is that whatever you earn will be tax-free.
While $420 a month may not seem like a hefty sum, it is enough to lighten the burden from your primary income source. It’s enough to take care of utilities, household, and other regular expenses. But to generate $420 a month through dividends, you will have to put all of your TFSA to work, which means using its complete contribution room of $69,500.
A better way is for a couple to pool their resources together. With two separate TFSA accounts, the total contribution room becomes $139,000. This is more than sufficient to start a decent passive income and still have a lot of room left for portfolio diversification and capital growth.
An energy aristocrat
Due to the oil crisis, many companies in the energy sector are currently trading at a discount. Canadian Natural Resources (TSX:CNQ)(NYSE:CNQ) is currently trading at $25.22 per share compared to its start-of-year value of over $40 per share. But this 38% discount isn’t the only reason to buy into this company. This 19-year-old Dividend Aristocrat is currently offering a very juicy yield of 6.74%.
Even though the operating income has dropped significantly from the last quarter, the dividends seem secure, with a 58% payout ratio. The stock doesn’t offer much when it comes to capital growth, but the company has grown its dividends quite rapidly – 84% in the past five years. The company carries a lot of debt, but it has enough assets to cover its short-term and long-term liabilities.
A financial aristocrat
First National Financial (TSX:FN) has recovered substantially from its fall in March, but it’s still trading at a 22% discount. It’s the largest private mortgage lender and underwriter in the country. Despite the overwhelming presence of the Big Five, it manages to furnish a decent number of mortgage loans every year. The company offers a return on equity of 29.7% to its investors.
As an Aristocrat, it has a history of increasing its dividends for eight consecutive years. The payout ratio is stable enough at 77%, and yield currently stands at 6.57%. Due to the nature of its business, it carries a lot of debt on its books, but it also has access to a huge cash pile.
Apart from dividend growth, the company offers plenty of capital growth as well, as evident from its five-year returns of 108%.
A real estate aristocrat
SmartCentres REIT (TSX:SRU.UN) is one of the country’s largest fully integrated REITs that focuses on retail properties and has dependable, long-term tenants. Its portfolio is composed of 157 properties, mostly retail, along with a massive mixed-use development project.
In terms of revenue generation, the company’s most profitable tenant is Walmart, which anchors 115 of SmartCentre’s shopping centers.
The company is currently trading at $20.7 per share, a flat 32% discount from its start-of-the-year value. The payout ratio of 102% is a bit shaky compared to the past five years, but it’s likely to get better once the economy starts improving. The yield is very attractive, at 8.89%.
Foolish takeaway
Let’s break down your fully stocked TFSA: $69,500, in the three companies.
$23,000 in Canadian Natural Resources: $129/month
$23,000 in First National Financial: $126/month
$23,500 in SmartCentres: $174/month
The total comes out to $429 a month in passive income. This amount will likely increase year to year, as all three companies are Dividend Aristocrats and grow the dividends.
