The Tax-Free Savings Account (TFSA) is the perfect place to generate and compound passive income. As per the name, all income earned from investments held in the account is tax free. You can earn as much as 10-20% more income in a TFSA, simply by keeping all your income and paying no tax.
Improve long-term TFSA returns by compounding passive income
Over the long term, these incremental income returns can significantly add up. It can really start to compound if you re-invest your dividends back into more income-generating stocks. The key is start investing early and regularly contribute to tax-advantaged accounts like your TFSA.
If you are looking for some ideas, here’s a simplified passive-income portfolio to consider. Put $60,000 to work and it could generate as much as $225 per month in tax-free income. At the Fool, we recommend a more widely diversified portfolio, but this just demonstrates the level of income you can earn in today’s stock market.
Own top real estate in your TFSA
The first stock in this starter portfolio is Dream Industrial Real Estate Investment Trust (TSX:DIR.UN). If you like real estate, but don’t have a huge amount of capital to buy a private property, real estate investment trusts (REITs) like Dream are a great alternative.
Dream is one of Canada’s largest industrial property landlords. It also owns high-quality properties in Europe, and it manages two joint venture partnerships in Canada and the United States. Industrial real estate has been one of the best real estate classes. Demand is high, supply is limited, and inflation has helped push up rents.
Dream grew funds from operation (FFO) per unit by over 9% last year. It could do just as well this year. The stock trades with a 4.8% dividend yield and a decent valuation. Put $20,000 into this stock, and you would earn $78.40 of monthly passive income tax free.
A top utility for a TFSA
AltaGas (TSX:ALA) looks to be another stock that would be a nice fit for earning TFSA passive income. It operates a diversified business that is split between Western Canadian midstream operations and a regulated natural gas utility in the U.S.
This company has been making strong progress simplifying its operations, reducing debt, and focusing on consistent total returns. While its midstream business can be volatile, it is backstopped by its high-end utility that is demonstrating better-than-average growth.
AltaGas has raised its dividend consecutively for the past three years. That pattern should continue. Put $20,000 into AltaGas stock and you would earn $231.84 every quarter, or $77.28 averaged monthly.
A top Canadian bank for passive income
Toronto-Dominion Bank (TSX:TD) has been a stalwart for dividends for years. It has a century-plus history of paying a dividend. It has grown its dividend by a +9% compounded annual rate over the past decade.
Certainly, given where the economy is at, Canadian banks could have some near-term headwinds. However, TD is very well capitalized, and it has been well managed.
With the stock down 13% over the past year, its valuation is not overly demanding at 9.5 times earnings. Take a multi-year investment horizon with this stock, and investors could see further dividend growth and solid high-single-digit returns.
Today, TD stock trades with a 4.24% dividend yield. If you bought $20,000 worth of TD stock in your TFSA, you could earn $215.04 of quarterly passive income, or $71.68 averaged monthly.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY |
| Dream Industrial REIT | 14.88 | 1344 | $0.05833 | $78.40 | Monthly |
| AltaGas | 24.13 | 828 | $0.28 | $231.84 | Quarterly |
| TD Bank | 89.21 | 224 | $0.96 | $215.04 | Quarterly |
