Want to get $3,926 per year in tax-free dividends in your TFSA?
Based on the maximum contribution — $75,500 — that takes a 5.2% yield. This is simplifying a little, because you could have more than $75,500 in TFSA holdings because of past gains. But if you were 18 or older in 2009 and contribute your maximum today, you have $75,500 in tax-free cash to play with.
With that amount of money invested at a 5.2% yield, you can get $3,926 in instant tax-free income. The challenge is finding that 5.2% yield. Sure, there are individual stocks that yield well over 5.2%. But modern portfolio theory says you have to diversify. So, you’ll need to do a little better than throwing it all on red. In this article, I’ll explore a portfolio of three stocks that yields 5.2% if equally weighted. With this portfolio held in a maxed out TFSA, you can get to $3,926 in annual dividend income.
Enbridge (TSX:ENB)(NYSE:ENB) is a dividend stock that yields 6.85% at today’s prices. Not only is its yield very high today, but it also has a long track record of raising its dividend. Over the past five years, ENB has raised its dividend by 9.3% annualized. That’s a pretty stellar track record of dividend increases. And it could continue. Enbridge just keeps winning the legal battles it’s embroiled in, and its new pipeline projects are going ahead as planned. Expect more transportation capacity, and therefore more revenue, for Enbridge in the future.
Canadian Imperial Bank of Commerce
Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM) is a Canadian bank stock that yields 4.02% at today’s prices. If you invest $75,500 at a 4.02% yield, you get $3,035 in cash back every year. That’s a pretty decent payout as it is. But a portfolio consisting of CM and ENB has a much higher payout than that.
Now, you might be wondering, “why not hold just ENB, then, if it has the higher yield?” The answer is, diversification. The more baskets you spread your portfolio across, the less the risk of breaking all the eggs. CM, as a financial stock, shouldn’t be too correlated with ENB, so its contribution to portfolio diversification should be substantial.
TransAlta Renewables (TSX:RNW) is a utility stock with a 4.73% yield. If you combine that with Enbridge’s yield (6.85%) and CM’s yield (4.02%), you get to a 5.2% total portfolio yield (if all three stocks are equally weighted).
Why RNW, specifically?
First, as a renewable energy utility, it is well positioned to thrive in an era of increasing climate change regulations.
Second, as a monthly-paying dividend stock, it provides increased frequency of income.
Third and finally, this stock has a lot of potential to rise in the future. Its most recent earnings were very disappointing due to a series of unplanned outages at some of its power plants. That was bad for the company, but it will recover to previous earnings levels, and the stock will probably rally when that happens. This stock is definitely riskier than the other two on the list, but it has a lot of potential to recover along with its business.
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 Andrew Button has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Enbridge.