Passive-income stocks have been safe-haven investment for risk-averse investors. Collecting passive income from dividend-paying stocks can be a psychological comfort when times are uncertain. It is a tangible cash reward that is a perfect hedge against the stock market’s ups and downs.
Compound passive-income wealth in your TFSA
It can also be a great way to compound wealth over time. If you are not in essential need of the passive income from investments, the Tax-Free Savings Account (TFSA) is a great vehicle to compound wealth.
Any passive income or capital gain earned in a TFSA is completely tax free. That means anything you earn can be re-invested and compounded.
How to earn over $10 a day in dividend income
Over time, that snowball effect can generate life-changing wealth. If you are looking for a tax-free way to generate more than $10 a day of reliable passive income, here is one way to get there.
You’d first need about $80,000 of capital to start with. Any Canadian who was 18 years or older before 2009 can contribute a grand total of $81,500 to their TFSA. I would recommend owning a portfolio of at least 10 to 15 stocks, but for illustration purposes you could put $40,000 into two high-quality dividend-paying stocks and achieve $10 per day.
Enbridge: A Canadian passive-income stalwart
The first stock you could consider buying for an elevated stream of passive income is Enbridge (TSX: ENB)(NYSE: ENB). Every three months, it pays a $0.86 dividend per share. That is equal to an annual 6.15% dividend yield. With $40,000 invested in this name, you could earn $615 a quarter, or $6.73 per day averaged over a year.
Enbridge is a solid picks-and-shovels way to play the recent energy boom. It transports around 20% of the oil produced in North America. If strong energy pricing continues, it could benefit from increased volumes of oil and natural gas flowing through its infrastructure.
Enbridge is not a high-growth name. However, its dividend is covered by contracted streams of cash flow. It has successfully grown its dividend over the past 10 years by a compounded annual rate of 11.8%. That dividend-growth rate will likely slow to the mid-single digits. Yet, for a growing stream of passive income and some modest capital upside, this is a solid stock to buy and hold.
Algonquin Power: A safe dividend-growth story
Another passive-income stock that produces growing streams of cash is Algonquin Power and Utilities (TSX: AQN)(NYSE: AQN). Algonquin Power owns and operates a diverse array of water, natural gas, and electric utilities across North America. It also has a large and growing renewable power portfolio.
The company has made its bread and butter by acquiring underutilized, carbon-heavy utilities. It cleans up their operations, increases efficiencies, and grows their return profile. It is repeating this formula with a recent large-scale utility acquisition in Kentucky.
This passive-income stock pays a $0.215 dividend per share every quarter. That equals a 4.52% dividend yield today. If you put $40,000 into Algonquin stock, you would earn $452 a quarter, or $4.95 daily averaged across a year.
The company has grown its dividend by about 10% annually for the past 10 years. Dividend growth may slow to the high single-digit range. However, Algonquin should still provide a great stream of inflation-protected passive income in the years ahead.
