Passive Income: 3 Bank Stocks for TFSA Wealth

Bank stocks are still the top options for Canadians seeking repeated passive income and building wealth through a TFSA.

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Do you own a Tax-Free Savings Account (TFSA) but have nothing in it? A wealth advisor might ask that question, because the TFSA is a powerful wealth-building investment account. You’re missing out on a lot if you’re eligible to open one but still haven’t.

Many think the TFSA is a just regular savings account, as the name implies. Knowledgeable accountholders don’t store cash in them but income-producing assets, especially dividend stocks.

Royal Bank of Canada (TSX:RY), Canadian Imperial Bank of Commerce (TSX:CM), and Laurentian Bank (TSX:LB) are no-brainer choices if you want to earn repeated passive income every quarter. The two big banks and the regional bank can help you build enormous TFSA wealth over time.

Bedrock of stability

According to the Canadian Bankers Association, the higher liquidity standards are why the country’s banking system is resilient. Most industry experts add they won’t collapse like Silicon Valley Bank and other collapsed American banks.

Therefore, you can sleep easy investing in RBC — the largest bank in Canada. This $181.4 billion bank is a bedrock of stability, and it has been sharing a portion of corporate earnings with shareholders since 1870 (153 years). The blue-chip stock trades at $127.26 per share (+0.95% year to date) and pays a 4.04% dividend.

Assuming you use your $6,500 annual limit in 2023 to buy RBC shares, you can generate $65.65 in passive income every quarter. However, your money will compound if you don’t touch the dividends and reinvest them every time. Contribute the max annually if finances allow and see how the power of compounding works.

High yield

CIBC is only the fifth-largest bank in Canada but not an inferior big bank. The $52.2 billion bank’s dividend track record is 155 years, and the dividend yield (6.01%) is higher than RBC’s. It outperforms the TSX year to date at +4.11% versus +0.01%. You won’t mind buying the stock at $57.02 per share.

The TFSA room is cumulative, and the maximum in 2023 is $88,000 for those who were at least 18 in 2009 and have never contributed. CIBC is an ideal holding for Canadians whose available rooms in the maximum. Assuming the yield remains constant, the capital will grow tax free to $282,760.90 in 20 years. If you keep the principal intact, the quarterly dividend in 2043 would be $4,248.48.

Small but reliable

Laurentian Bank is a small-cap stock but is as reliable as the big banks regarding dividend payments. It trades at $31.05 (-2.5% year to date) but pays a juicy 5.9% dividend. The $1.48 billion bank isn’t immune to market volatility but has endured harsher economic downturns.

Despite higher provisions for credit losses in the first quarter (Q1) of fiscal 2023, LB maintained healthy capital ratios (9.1%) and liquidity levels. PCL increased 63.8% to $15.4 million versus Q1 fiscal 2022. In the quarter that ended January 31, 2023, net income fell 5% year over year to $51.91 million.

Nevertheless, the board approved a dividend hike by the same percentage. LB’s (1846) smaller market cap shouldn’t dissuade investors, as the bank is older than RBC (1864) and CIBC (1867).

Must-own TFSA stocks

Canadian bank stocks are must-owns in a TFSA. Building wealth or a substantial retirement fund is not a possibility but a certainty if you hold them forever.

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 Christopher Liew has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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