TFSA: Earn $4,686/Year Passive Income for Life

Higher interest rates allow investors to buy quality dividend stocks for more passive income. Use your TFSA to earn tax-free income now!

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The hard part about saving and investing is getting started. If you already got some savings under your belt, give yourself a pat on the back. Now, let’s get that money working for you. You can earn tax-free passive income from your Tax-Free Savings Account (TFSA).

Each year, the TFSA has a contribution limit. This year, it’s $6,000. Since its inception in 2009, the TFSA contribution room has added up to $81,500. If you’ve never contributed to a TFSA and were eligible for the account since 2009, you would have that much contribution room.

Higher interest rates have increased the returns potential of lower-risk, fixed-income investments like GICs. The valuations of dividend stocks, which are viewed as higher risk, have also come down, creating an attractive opportunity for investors to pick up quality dividend stocks for more passive income.

You can easily buy a basket of dividend stocks for more income than a year ago. The following stocks provide an average yield of about 5.75%. On an investment of $81,500, that equates to $4,686 per year in passive income.

Bank of Nova Scotia stock

Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) is a big Canadian bank that has paid dividends for 189 years! At $72.40 per share at writing, it offers the most attractive dividend yield among the big Canadian bank stocks. Its 5.69% yield is perfect for TFSA tax-free passive income.

What’s more to like is that it’s able to increase its payout over time. Its 10-year dividend-growth rate is 5.8%. For doing nothing but sitting on the shares in your TFSA, you can enjoy growing passive income tax free!

In the trailing 12 months, the international bank reported net income of over $10 billion. It paid out close to $5 billion as dividends for a sustainable payout ratio of approximately 49%.

Importantly, the bank stock is undervalued by about 26% from its long-term normal valuation. So, on a more positive economic outlook, you’d see some nice price appreciation on the stock as well.

Dream Industrial REIT

The TFSA is also a good place to hold real estate investment trusts (REITs) like Dream Industrial REIT (TSX:DIR.UN) for monthly income. It provides the flexibility to withdraw tax free should you choose to use the money to pay recurring bills like utilities.

Again, rising interest rates have weighed down valuations of REITs. Dream Industrial REIT has tumbled about a third from its 52-week high. Consequently, it now offers a compelling cash distribution yield of 5.84%.

The demand for industrial spaces remains strong from a continuing e-commerce trend. There’s low availability in industrial markets. The fundamentals in Canada are particularly spectacular — the vacancy is about 1.6% country wide. In Europe, it’s about 5%. On new leases and renewals so far this year, the REIT witnessed year-over-year market rent increases of 26% in Canada and 8.5% in Europe.

From a year ago, Dream Industrial has also expanded its portfolio by 42 properties to 257 assets. In the first half of the year, it reported funds-from-operations-per-unit growth of 13% to $0.43, improving its payout ratio to 81% versus 92% a year ago.

Bottom line

Don’t just count on two dividend stocks for passive income. Explore more dividend stocks to diversify the source of your tax-free income stream.

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 Kay Ng has a position in DREAM INDUSTRIAL REIT. The Motley Fool recommends BANK OF NOVA SCOTIA and DREAM INDUSTRIAL REIT.

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