Top Stocks for Passive Income: How to Earn $366 Per Month Tax Free

Canadian savers can take advantage of their Tax-Free Savings Account contribution limits to invest in a diversified portfolio of top TSX dividend stocks to generate steady streams of tax-free passive income.

| More on:
money cash dividends

Image source: Getty Images

Canadian savers can take advantage of their Tax-Free Savings Account (TFSA) contribution limits to invest in a diversified portfolio of top TSX dividend stocks to generate steady streams of tax-free passive income.

TFSA limit 2023

The TFSA limit for 2023 is $6,500. This brings the total maximum contribution space to $88,000. That’s a large enough sum for investors to build decent portfolios of dividend stocks that can generate reliable and growing streams of tax-free dividend.

All TFSA investors should consider maxing out their contribution room before holding investments in taxable accounts. This is particularly the case for retirees who receive Old Age Security (OAS) as well as other taxable pensions, including the Canada Pension Plan and company pensions.

Why?

It doesn’t take long for net world income to reach the CRA’s limit before the OAS pension recovery tax starts. For the 2023 income year, the number to watch is $86,912. Every dollar of net world income above that amount will trigger a $0.15 OAS clawback, reducing the OAS payments that begin in July 2024.

TFSA earnings are not counted by the CRA when it calculates net world income, so retirees can potentially reduce or avoid the OAS clawback by earning investment income in the TFSA rather than in a taxable account.

Fortis

Fortis (TSX:FTS) raised its dividend in each of the past 49 years and intends to boost the payout by 4% to 6% per year through at least 2027. This is the kind of quality dividend stock that would be ideal for a portfolio focused on passive income.

Fortis has $64 billion in utility assets and gets 99% of its revenue from regulated businesses, including power production, electricity transmission, and natural gas distribution. The current $22.3 billion capital program is expected to drive up the rate base enough to support the planned dividend increases.

Fortis stock trades near $56 at the time of writing compared to the 12-month high around $65. Investors can get a solid 4% dividend yield on the dip and simply wait for the dividend to increase in the coming years.

Bank of Nova Scotia

Bank of Nova Scotia (TSX:BNS) generated fiscal 2022 earnings that beat the 2021 results. The stock price, however, is down about 24% over the past year. Investors dumped bank stocks through much of 2022, as rising interest rates stoked fears of a recession in 2023 or 2024.

An economic slowdown is expected, but economist widely predict it will be short and mild. Households and businesses built up large savings during the pandemic and this safety net is expected to mitigate the impact of rising loan expenses and high inflation until the Bank of Canada can get inflation back down to its 2% target.

At the current multiple of 8.7 times trailing 12-month earnings, BNS stock looks priced for a deep economic downturn.

Near-term volatility is expected, but the dividend should be safe. Bank of Nova Scotia increased the payout in 43 of the past 45 years. At the time of writing, the distribution provides an annualized yield of 5.9%.

The bottom line on top stocks to buy for passive income

Fortis and Bank of Nova Scotia are good examples of top TSX dividend-growth stocks that now look cheap and offer attractive yields.

Investors could quite easily put together a portfolio of quality dividend stocks today that would provide an average yield of 5%. This would generate $4,400 per year in tax-free income. That averages out to more than $366 per month!

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.

The Motley Fool recommends Bank Of Nova Scotia and Fortis. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker has no position in any stock mentioned.

More on Investing

Doctor talking to a patient in the corridor of a hospital.
Investing

TFSA: Healthcare Dividend Stocks Are Perfect for Passive Income

Top healthcare dividend stocks like Extendicare Inc. (TSX:EXE) and others can provide huge passive income in your TFSA.

Read more »

TFSA and coins
Tech Stocks

TFSA: Invest in These 2 Stocks for a Legit Chance at $1 Million

Are you interested in building a $1 million portfolio? Invest $20,000 in these two stocks!

Read more »

edit Person using calculator next to charts and graphs
Investing

The Top TSX Stock on My Watch List Right Now

Here's why Alimentation Couche-Tard (TSX:ATD) remains a top TSX stock that long-term investors seeking growth and yield will want to…

Read more »

Hourglass projecting a dollar sign as shadow
Investing

3 Stocks to Add to Your TFSA ASAP

Given their stable cash flows and solid underlying businesses, these three stocks are excellent additions to your TFSA in this…

Read more »

edit Person using calculator next to charts and graphs
Dividend Stocks

Better Buy: Fortis Stock vs Enbridge

Fortis stock and Enbridge are top dividend stocks on the TSX today. Which stock is better buy for safe dividend…

Read more »

Canadian Dollars
Dividend Stocks

How to Make $1,500 in Passive Income 4 Times a Year

Blue-chip TSX stocks such as Enbridge can enable investors to create game-changing wealth over the long term.

Read more »

Woman has an idea
Investing

5 Stocks You Can Confidently Invest $500 in Right Now

Consider putting your surplus cash in these stocks for stellar capital gains.

Read more »

IMAGE OF A NOTEBOOK WITH TFSA WRITTEN ON IT
Dividend Stocks

TFSA: How to Easily Turn $10,000 Into $500/Year of Passive Income

You don't need to be a stock market expert to turn $10,000 into a $500 of tax-free passive income. Here's…

Read more »