TFSA: Invest $1,000 and Get $7,200/Year in Passive Income 

You can earn the passive income you desire by doing a reverse calculation. What you need is regularly investing for the long term.

| More on:

Don’t leave your Tax-Free Savings Account (TFSA) investment returns to luck. If you are playing the game of luck, you are funding the next penthouse of hedge fund managers and smart investors. Instead, you should determine the passive income amount you want to earn from your TFSA and then work backwards to achieve the pre-determined return. When you know what you are doing, the risk is less, and luck is a bonus. 

Step 1: Decide your TFSA passive income goal

The right way to earn passive income is by disciplined investing. First, take a paper and write down your passive income amount at the top. I want to earn $7,200/year in tax-free passive income. 

Most dividend aristocrats trading on the TSX have an average dividend yield of 6%. If you want the 6% annual yield to equate to $7,200, you need to invest $120,000. To accumulate $120,000, you need to invest $1,000 a month for the next 10 years. 

If your stock dividend grows or announces a bonus dividend, you are in luck and will achieve your $7,200 target early. Investing is like planning your route. Sometimes, traffic or a flat tire might slow you down, but an empty road could help you cover up for the lost time. 

Step 2: Determine where to invest $1,000/month

The current market is lucrative with opportunities to buy strong dividend stocks at a lower price and book a dividend yield greater than 6%. TC Energy (TSX:TRP) (6.66%) and SmartCentres REIT (TSX:SRU.UN) (6.96%) have a history of paying regular dividends without any cuts. 

A $2,500/year passive income from TC Energy

TC Energy’s stock price dipped to its 52-week low in December after an oil spill from its Keystone Pipeline. The last time the stock fell because of this pipeline was when U.S. President Joe Biden cancelled the permit for the pipeline expansion. 

It has created an opportunity for investors to lock in a 6.66% yield in this dividend aristocrat, with a dividend compounded annual growth rate (CAGR) of 7%. The oil spill might slow or stall its dividend growth, but it is unlikely to lead to dividend cuts. The company is banking on natural gas pipeline projects for revenue growth and has been disposing of its oil assets to reduce expenses. 

Moreover, it has a dividend reinvestment plan (DRIP) that can help you buy more shares of TC Energy from the dividend money. Here is a rough calculation: a $300 monthly investment in a DRIP can buy you over 680 shares of TC Energy in 10 years. Assuming the company sustains its dividend per share at $3.60 with no growth in 10 years, 680 shares will give you $2,500/year in passive income. If the stock continues to grow dividends, that would be a bonus. 

$2,600 in passive income from SmartCentres REIT 

The rising interest rate has pulled down SmartCentres REIT’s stock price by 14% to $27.04 as property prices started cooling. SmartCentres REIT’s third-quarter net income fell 98% due to the fair market value adjustment of investment properties. The REIT also saw interest expense surge by $4.3 million as its variable rate debt ratio increased to 17% from 11% a year ago. But none of this impacted its distribution as its payout ratio improved to 86.6% from 96.8% a year before.

The REIT’s stock price may remain weak next year as the central bank maintains a higher interest rate. A $300 monthly investment in SmartCentres DRIP can buy you 1,403 shares of the REIT in 10 years, assuming the stock price grows at a modest rate of 3% every year. If it maintains its $1.85 distribution per share, you would get $2,600 annually in passive income. 

Investing in high-yield dividend stocks

You can still earn passive income by setting aside $400/month in high-yield dividend stocks that carry a risk of dividend cuts. Two such stocks include Timbercreek Financial (9.9%) and Algonquin Power & Utilities (10.51%). If they cut dividends by a third, these stocks will still provide an average yield of 6%, meeting our expected goal of $7,200 in passive income. 

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 SmartCentres Real Estate Investment Trust. The Motley Fool has a disclosure policy.

More on Dividend Stocks

A close up image of Canadian $20 Dollar bills
Dividend Stocks

2 TSX Dividend Stocks With Yields Above 7% That You Can Buy With $100

Here are two high-yielding TSX dividend stocks you can buy with less than $100 per share today and hold for…

Read more »

oil and gas pipeline
Dividend Stocks

Should You Buy Enbridge Stock on a Pullback?

Down 25% from all-time highs, Enbridge stock remains a top investment choice due to its diversified business and steady cash…

Read more »

Redwood trees stretch up to the sunlight.
Dividend Stocks

2 Fantastic Growth Stocks to Buy Right Now

These two growth stocks aren't your average growth stocks, as shares rise higher and higher after earnings, and more's to…

Read more »

Businessmen teamwork brainstorming meeting.
Dividend Stocks

1 Magnificent Dividend Stock Down 15% to Buy and Hold Forever

Enbridge is off the 12-month lows but still trades at a large discount to its 2022 high.

Read more »

Increasing yield
Dividend Stocks

My Top 5 Ultra-High-Yield Dividend Stocks to Buy in May

If you’re looking to build a passive-income stream, these five dividend stocks should be on your radar.

Read more »

Payday ringed on a calendar
Dividend Stocks

A 10.6% Dividend Stock That Provides Monthly Cash Payments

A dividend stock with a mouth-watering yield providing monthly cash flow streams.

Read more »

Dividend Stocks

The Top Canadian REITs to Buy in May 2024

These three REITs have envious growth potential and trade cheaply today, making them three of the top Canadian stocks to…

Read more »

Young woman sat at laptop by a window

Why I Can’t Stop Buying Shares of This Magnificent High-Yield Stock in My Retirement Account

This utility is an excellent retirement stock, providing juicy income, income growth, and wealth creation for the long haul!

Read more »