The Tax-Free Savings Account (TFSA) is an incredible tool for anyone looking to build wealth for retirement. All your income (capital gains, dividends, or interest) is safe from tax reporting or tax liability in the account. By paying no tax on investment income, Canadians save as much as 10-20% more of their capital.
Over years and decades, that amount saved can be worth a small fortune, especially if it is compounded at a high rate of return. If you have a lot of time, you can build a TFSA passive-income stream that you can rely on in retirement.
Earning $500/month is more tangible than you think
If you wanted to earn $500 per month ($6,000 per year) in passive income in retirement, you would need around $120,000 invested in dividend producing stocks (at a 5% average dividend yield).
$120,000 is a big sum. It is also a sum larger than the current total TFSA contribution limit of $88,000 today. Fortunately, if you have years and decades to invest, it is still a tangible goal for retirement.
You only need $25,000 today to have $120,000 in 10 years
Let’s say that today, you only start out with $25,000 invested in your TFSA. If you invest it in quality Canadian dividend stocks, with a 5% average yield, you could earn as much as $1,250 a year in dividends.
Then add the $6,500 annual TFSA contribution limit every year. In 10 years or less, the combination of dividends and contributions invested could compound into $120,000. That doesn’t factor any capital gains into the equation either.
The point is, it is possible to earn $500 in monthly income (and relatively quickly). It will take discipline, patience, a savings mentality, and smart stock picking. Speaking about stock picking, here are two quality dividend stocks that could help you hit your $500/month goal.
A top renewable stock for any TFSA
Brookfield Renewable Partners (TSX:BEP.UN) is a global leader when it comes to owning and developing renewable and alternative power assets. It currently operates 24 gigawatts of power, but it has a development pipeline more than four times that size. Now, not all of that will be completed, but it just demonstrates the scale of opportunities in front of the company.
Scale matters when it comes to capital and operating efficiency. That is why Brookfield is one of the highest-quality stocks in the renewable segment.
It is not the cheapest stock, but after a recent pullback it trades with an attractive 5% dividend yield. If you want exposure to the renewable trend, this is a quality stock to hold for income and modest growth ahead.
A top telecom stock for a TFSA
A blue-chip stock to consider buying for your TFSA is TELUS (TSX:T). It is Canada’s second-largest telecommunications stock. When interest rates were low, TELUS wisely accelerated its fibre and 5G infrastructure spending.
Now, it has one of the best networks in Canada. Combine that with its unique blend of bundled offerings, and TELUS has been delivering industry-leading customer additions and earnings growth.
TELUS has also been building out an array of digital businesses that are gaining steam. This is an undervalued growth option for the stock. After a recent pullback, TELUS stock yields a 5.2% dividend. It has a great history of growing that dividend, so your TFSA income compounding could accelerate even faster than anticipated.