TFSA: Invest $10,000 and Get $500/Year in Passive Income

Do you want to invest in stocks to get passive income? For that, you need smart diversification. Here’s how to start.

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Editor’s note: A previous version of this article said investors could earn $500 each month with the suggested investments. That payout would be yearly. The article has been corrected.

If you have $10,000 in your Tax-Free Savings Account (TFSA), do not invest all in one go. Haste causes waste. The stock market goes through seasonal and cyclical moments. It is always good to buy the dip to enhance your returns. But this is tricky, as a stock falls when there is bearish sentiment and uncertainty. The bear market has created an opportunity to buy some good dividend stocks at a dip. 

Why invest in Canadian energy stocks?

The trick is to invest in one’s strength, and Canada’s strength is its large oil sand reserves. Although Canada doesn’t have a cost advantage in oil production over Saudi Arabia and Russia, it has a big consumer: the United States. And the global energy crisis has altered the supply chain in Canada’s favour. Europe is buying liquefied natural gas (LNG) and oil from the United States. 

Enbridge (TSX:ENB) is tapping this LNG export opportunity with its LNG pipelines. It plans to tap about 30% share of the North American LNG export market from its upcoming projects. All this will bring new cash flow streams for Enbridge and help it increase dividends in the future. Even without the LNG opportunity, Enbridge has a stable cash flow from its existing pipeline infrastructure. 

While Enbridge is a beneficiary of the oil and gas development, it is also at risk from the energy sector shift to greener alternatives like wind and solar. And that is where Algonquin Power & Utilities (TSX:AQN) benefits. The utility has a 4.2-gigawatt power-generation capacity, of which 75% is wind energy. The stock is oversold, as the company reported lower-than-expected, third-quarter adjusted net earnings and reduced its 2022 guidance. However, electricity will never go out of demand, especially renewable energy. AQN can withstand a crisis and recover. 

If you invest in the above two energy stocks, you can enjoy the bulls of the global energy crisis and switch from fossil fuel to renewables while enjoying regular dividends. 

Invest in other stocks for effective diversification of risk 

Apart from energy, it is important to diversify into other sectors not sensitive to interest rates and asset classes not sensitive to global politics. Real estate is another hot sector, as Canadian property prices have been in a long-term bubble and are seeing some correction. 

Have you heard of Canadian Tire? Its stores are owned and managed by CT REIT (TSX:CRT.UN). The real estate investment trust (REIT) is using the property market’s bearishness to add more income-generating properties to its portfolio. In the third quarter, the REIT’s adjusted operating income increased 6.1% year over year due to an increase in rent and the addition of more income-generating properties. However, its net income fell 1.7%, as the investment value of its properties fell due to a decline in property prices. The reduction in asset value pulled the REIT stock price down 15% but increased its distribution yield to 5.55%. 

If you buy the stock now, you can lock in a higher distribution and a 15-20% capital appreciation when property prices recover with the economy. 

While the interest rate hike affected AQN and CT REIT, it did not affect Enbridge and BCE (TSX:BCE), as a significant portion of their debt is at a fixed rate. Canada’s largest telecom operator BCE is also not affected directly by the energy crisis. While all other stocks see seasonal trends, BCE sees technological cycles in the long term. BCE is currently leading the 5G infrastructure space in Canada and witnessing some of the highest revenue increases in wireless. 

Moreover, communication services are not directly affected by inflation, giving you a hedge against the cyclicality of Enbridge and AQN. 

How to get $500 annually in passive income 

The above four stocks will give you the diversification that an all-weather portfolio needs. When one sector underperforms, the other outperforms and earns you passive income. A $2,500 investment in each of the above four stocks at their current dip can help you balance your risk and reward.

No stock will remain the same, and some might give negative returns due to changing business environment. Smart diversification can earn you $500/year in TFSA passive income in the long term. 

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 Puja Tayal has no position in any of the stocks mentioned. The Motley Fool recommends Enbridge. The Motley Fool has a disclosure policy.

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