TFSA Investors: Turn $50,000 Into $1 Million and $20K/Year in Tax-Free, Passive Income

Blue-chip stocks on the TSX, such as Enbridge and TD Bank, have generated significant returns to investors in the last two decades.

| More on:
Growing plant shoots on coins

Image source: Getty Images

Investors are always on the lookout for stocks that can turn a $10,000 investment into $1 million or more. But it is extremely difficult to consistently find such stocks that can keep churning exponential returns. Instead, it would be more prudent to identify a basket of blue-chip companies that can create wealth over time and where investors can benefit from the power of compounding.

Most blue-chip stocks trading on the TSX also pay investors a dividend that can be reinvested and increase portfolio values over time. Further, if these stocks are held in a TFSA (Tax-Free Savings Account), both dividends and capital gains will be exempt from Canada Revenue Agency taxes.

Let’s take a look at how TFSA investors can turn $50,000 into $1 million and generate $20,000 in tax-free income each year by buying dividend stocks.

Enbridge

A well-diversified energy infrastructure company, Enbridge (TSX:ENB) is among the largest entities on the TSX. A majority of Enbridge’s cash flows are backed by long-term contracts and are indexed to inflation, making it relatively immune to commodity prices.

Enbridge has delivered solid returns to investors in the last two decades. Since November 2002, ENB stock has returned 978% to investors in dividend-adjusted gains.

An investment of $12,500 in ENB stock would allow investors to buy 1,104 shares of the company and earn $448 in dividends in the next 12 months, indicating a yield of 3.6%. Now, 1,104 shares of Enbridge will allow investors to generate $3,800 in annual dividends today, increasing your effective yield to 30.4%.

goeasy

A cyclical company operating in the financial lending space, goeasy (TSX:GSY) stock has returned a staggering 4,000% to investors in dividend-adjusted gains in the last 20 years. GSY has been among the top-performing stocks on the TSX and is currently trading 49% below all-time highs.

An investment of $12,500 in GSY stock would allow you to buy 2,887 shares in November 2002. The company started paying a quarterly dividend of $0.01 per share to investors in May 2004, which increased to $0.06 per share in March 2005. So, in the 12 months after starting to pay a dividend, 2,887 GSY shares allowed investors to generate $346 in annual payouts.

Today, your annual dividends will stand at $10,508, increasing your effective yield to a stellar 84%. goeasy has increased its dividend at an annual rate of 28% in the last 18 years.

TD Bank

One of the largest banks in North America, Toronto-Dominion Bank (TSX:TD) is another blue-chip stock that should be part of your equity portfolio. In the last 20 years, TD Bank stock has surged 1,110%. Despite these outsized gains, it’s also down 19.3% from all-time highs.

An investment of $12,500 in TD stock would allow investors to buy 834 shares of the company. You could then generate $466 in annual dividends in the next 12 months. Today, 834 shares would allow you to derive more than $2,965 in annual dividends.

Brookfield Renewable Partners

The final blue-chip stock on my list is Brookfield Renewable Partners (TSX:BEP.UN), which is among the largest clean energy companies globally. Since November 2002, BEP stock has returned 2,004% to investors.

An investment of $12,500 would then allow you to buy 1,543 shares of the company, resulting in dividend payments of $750. Today, 1,543 shares of BEP will result in annual dividend payouts of $2,680 each year.

The bottom line

We can see a cumulative investment of $50,000 distributed equally in these four TSX stocks two decades back would be worth $1.05 million today. Further, your dividend payments would surge to almost $20,000 each year, translating to an effective yield of almost 40%.

While historical gains do not guarantee future returns, it makes sense to identify similar fundamentally strong companies that have the potential to consistently raise dividends and outpace the markets over time.

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 Aditya Raghunath has positions in Brookfield Renewable Partners and ENBRIDGE INC. The Motley Fool recommends Brookfield Renewable Partners and Enbridge. The Motley Fool has a disclosure policy.

More on Dividend Stocks

A meter measures energy use.
Dividend Stocks

TFSA Investors: 3 Safe Utility Stocks to Buy and Hold for Decades

Here are three top utilities to spend some fresh TFSA cash on in the new year.

Read more »

money cash dividends
Dividend Stocks

TFSA Investors: An Easy Way to Boost Your Payouts to $350 Per Month

Because of the tax-free nature of the TFSA, investors have several advantages, especially when buying high-quality dividend stocks.

Read more »

STACKED COINS DEPICTING MONEY GROWTH
Dividend Stocks

TFSA Passive Income: Earn $126/Month Tax Free for Decades

Do you seek passive income? Leverage your TFSA to earn a solid tax-free passive income through these stocks.

Read more »

lab worker inspects test tubes
Dividend Stocks

Warren Buffett’s Buying This Passive Income Stock

Berkshire began buying this chemical company earlier this year and hasn't stopped.

Read more »

Various Canadian dollars in gray pants pocket
Dividend Stocks

Need Passive Income? Turn $5,000 Into $23.85 Every Month

If you're looking for passive income that comes in like a paycheque, this dividend stock provides that to you along…

Read more »

Silver coins fall into a piggy bank.
Dividend Stocks

A TFSA Contribution Room of $88,000 and 1 Dividend Aristocrat Can Make You $172,330 Richer

A high-yield Dividend Aristocrat in the energy sector is a suitable holding for Canadians with $88,000 available contribution rooms in…

Read more »

Dollar symbol and Canadian flag on keyboard
Dividend Stocks

2 Dividend Stocks to Buy Now Under $50

Here are two of the best under-$50 dividend stocks you can buy in Canada right now.

Read more »

TELECOM TOWERS
Dividend Stocks

If I Could Only Buy 1 Stock Before 2023, This Would be it!

If you could buy 1 stock before 2023, what would it be? Here’s the stock I’m considering, and I think…

Read more »