TFSA Users: $10,000 in This 6.38% Stock Pays $638 Per Year

The 2020 financial crisis gives enough reason to increase savings. TFSA users with $10,000 capital can earn $638 in tax-free money from a high-yield investment like the Bank of Nova Scotia stock.

| More on:
IMAGE OF A NOTEBOOK WITH TFSA WRITTEN ON IT

Image source: Getty Images

Have you been maximizing your Tax-Free Savings Account (TFSA) in 2020? There are valid reasons you should be increasing your savings, especially during times of crisis.

High-yield but safe dividend stocks will provide you with cash flows that can serve as emergency money when the need arises. When the investment is within your TFSA, all interest, dividends, and capital gains are tax-free. You also hit two birds (tax savings and hedge against inflation) with one stone.

TFSA refresher

The primary goal of a TFSA user is to set aside money in eligible investments. Dividend stocks are ideal choices because they deliver higher returns. Your savings will grow tax-free throughout your lifetime. Similarly, you can withdraw the funds at any time without the hassle of taxation.

However, you can’t use your TFSA to trade stocks to capture price spikes and make profits frequently. The Canada Revenue Agency (CRA) will treat the income from this prohibited practice as business income and, therefore, taxable. You also need to monitor the available contribution room so as not to pay a 1% tax monthly due to over-contribution.

The federal government of Canada introduced the TFSA in 2009. Your TFSA is one of a kind because it’s an all-purpose savings account. Users have the flexibility to save for a rainy day or retirement.

You can achieve your long-term financial goals because the balance compounds and builds up over time. Retirees make full use of the TFSA to minimize the impact of the 15% clawback in the Old Age Security (OAS) pension.

Best fit for the TFSA

A Dividend Aristocrat like Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) or Scotiabank best fits the TFSA. Aside from its dividend track record of 188 years (since 1832), the historical return of this bank stock over the last 20 years is 560.24%.

Given the perpetually low payout ratio, the dividends are safe. Scotiabank maintains the ratio at a healthy range of 50% to 60%. This $69.13 billion bank retains earnings to fuel growth while sharing some to shareholders.

If you take a position now, you can purchase the stock at a 21% discount. At $57 per share and a dividend yield of 6.38%, your $10,000 will produce $638 in annual income. As Scotiabank pays dividends quarterly, you have $159.50 in tax-free money every three months. Assuming you hold the stock for 20 years, the value will increase three-fold to $34,450.83.

There never was a time in the era of dividend payments that the big Canadian banks cut their dividends. Throughout the distant and recent recessions, Scotiabank has been consistently paying dividends. The bank has a sizable credit loan provision in case the portfolio turns sour.

Scotiabank is the industry leader in financial crime risk management and a prominent mover of Environmental, Social and Governance (ESG) related investments.

Perfect tandem

The TFSA and Scotiabank are the perfect tandem. You can create or build wealth. Furthermore, you won’t need to beg for temporary government aid when there is a financial crisis. Your fallback or safety net is permanent. It could last a lifetime.

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 Christopher Liew has no position in any of the stocks mentioned. The Motley Fool recommends BANK OF NOVA SCOTIA.

More on Dividend Stocks

thinking
Dividend Stocks

Should You Buy BCE Stock for its 8.6% Dividend Yield?

Down over 20% from all-time highs, BCE stock offers you a tasty dividend yield in 2024. But is the TSX…

Read more »

grow dividends
Dividend Stocks

How Long Would It Take to Turn $20,000 Into $100,000 With TSX Dividend Stocks?

Here's how high-quality TSX dividend stocks and the power of compound interest can help grow your investments by 400% or…

Read more »

Paper airplanes flying on blue sky with form of growing graph
Dividend Stocks

2 Soaring Stocks I’d Buy Now With No Hesitation

These two stocks may be the most expensive on the market, but they're high for a reason! And I'm still…

Read more »

Hour glass and calendar concept for time slipping away for important appointment date, schedule and deadline
Dividend Stocks

Invest $374.50 Each Month to Create Passive Income of $288 in 2024

Investing a specific amount each month to create passive income this year is possible with monthly dividend payers.

Read more »

Happy retirement
Dividend Stocks

2 Stocks to Help Turn $100,000 Into $1 Million

If you want to reach $1 million, $100,000 can certainly get you there. Even if you invest in some low…

Read more »

warning or alert
Dividend Stocks

Income Alert: These Stocks Just Raised Their Dividends

There's no shortage of companies that raised their dividends recently. Here's a trio of options to consider buying now.

Read more »

Business success with growing, rising charts and businessman in background
Dividend Stocks

Don’t Look Now, But These 3 TSX Stocks Look Poised for a Nice Rally 

Three TSX stocks are in a downtrend amid headwinds. 2024 may be rocky for them, but they are poised for…

Read more »

protect, safe, trust
Dividend Stocks

3 Safe Dividend Stocks to Beat Inflation

These three dividend stocks are excellent buys to beat inflation, given their solid underlying businesses and high yields.

Read more »