TFSA Passive Income: How to Earn $300 a Month in Tax-Free Income

Owning dividend stocks is one of the easiest ways to build a passive-income stream. Here’s how to do it completely tax free.

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When it comes to building a passive-income stream, dividend stocks are one of your best bets. Fortunately, the TSX has no shortage of high-yielding dividend stocks to choose from. If you’re instead looking for a dependable payout, there are plenty of Dividend Aristocrats to choose from.

Once you have chosen the companies you’d like to invest in, the question becomes, where should you hold those investments? While there are a few options, if you don’t want to pay any tax on those dividends, a Tax-Free Savings Account (TFSA) is where you should be investing.

Any gains or passive income generated from investments held within a TFSA are not taxed. The catch is that there is an annual contribution limit, which now totals $81,500 dating back to its introduction in 2009.

If you’ve yet to make a contribution to a TFSA, don’t worry. Unused contributions can be carried over from year to year. 

Earning $300 a month in passive income

Let’s now look at an example of how a Canadian investor can earn the equivalent of $300 a month in passive income. All it takes is a maxed-out TFSA and a couple of investments in dividend-paying companies.

Don’t get me wrong; it will take hard work to fully fund a TFSA with $81,500. But once you’ve done that, you have the ability to build a tax-free, cash-generating monster of a portfolio.

As an example, let’s assume that the entire $81,500 was invested in a dividend stock paying a yield of 4.5%. Which, I’ll add, is not that difficult to find on the TSX today. On an annual basis, that dividend would pay its shareholders about $3,650, or $305 a month.

If that sounds interesting to you, I’ve reviewed two top dividend stocks that should be on your watch list. 

Both stocks are yielding close to 5.3% right now, which would end up generating more than $350 a month for its shareholders.

Algonquin Power

At a market cap of $12 billion, Algonquin Power (TSX:AQN)(NYSE:AQN) is a leading Canadian utility provider. 

I’ll admit, there are more exciting companies than this one to invest in. But, if you’re interested in owning a dependable Dividend Aristocrat, this stock is perfect for you.

As a slow-growing utility stock, volatility levels tend to remain fairly low. Case and point, shares are flat on the year while the broader market is down close to 10%.

At today’s stock price, the company’s annual dividend of $0.95 per share yields just shy of 5.3%.

Bank of Nova Scotia

For anyone looking to build a passive-income stream through dividend investing, the major Canadian banks are a great place to start. You’ll be able to find unbelievably long dividend-payout streaks as well as top yields.

At a yield of just over 5.3%, Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) ranks among the highest of the Big Five. On top of that, the nearly $100 billion bank has been paying out a dividend for close to 200 consecutive years.

This is another unexciting company to own but a perfect one if passive income and stability are what you’re looking for.

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

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