Canadians who were eligible for a Tax-Free Savings Account (TFSA) since its inception in 2009 have $88,000 of TFSA room if they never contributed before. With an $88,000 TFSA, you only need a dividend yield of a little less than 4.1% to earn $300 per month (or $3,600 a year) tax-free income.
GICs for conservative investors
The best one-year Guaranteed Investment Certificate (GIC) offers a yield of about 4.75% in interest income. GICs are risk-free investments in the sense that they provide fix income and principal protection. So, the most conservative investors might park some of their money in GICs, especially if they know they’d need the money in a year. For your information, GICs typically mature from three months to five years.
Since interest income are taxed at your marginal tax rate in taxable accounts, some investors earn interest income in their TFSAs. The downside of GICs is that their returns could be essentially negative when you adjust for inflation. This can be the case when inflation is high. For example, if inflation were 6%, but your GIC interest rate were 5%, the purchasing power of your investment would have declined.
Still, if you have an $88,000 TFSA and target passive income of $300/month, you can overachieve with GICs right now with principal protection on your original investment. This TFSA can get you $4,180 in stress-free income on a 4.75% interest rate.
Consider taking on greater risk if you plan to invest longer term in your TFSA.
Earn more from dividend stocks
You can potentially earn more returns from dividend stocks. For example, Brookfield Renewable Partners (TSX: BEP.UN) fits the bill for a cash distribution yield of 4.33% at writing. An $88,000 investment would, in fact, make about $3,810 in the first year.
What’s more to like about the renewable power utility stock is that it tends to increase its dividend. Its cash flows are 92% supported by long-term power-purchase agreements, averaging 14 years. So, you’re likely to earn more and more passive income from the stock over time. BEP’s 10-year dividend-growth rate is 5.7%. Going forward, it aims to increase its cash distribution by at least 5% per year. Its last cash-distribution hike of 5.5% in February aligns with this growth rate.
It’s anticipated that the renewables sector requires investments of more than US$150 trillion over the next three decades. Seeing as BEP is a global leader in the space, it has a long tailwind of growth. Management doesn’t just take on any projects. It targets a 12-15% rate of return on its investments. Its portfolio is diversified across geographies and technologies across hydro, wind, solar, and distributed generation and storage.
On March 27, Brookfield Renewable announced that, along with its institutional partners, it signed a binding agreement to acquire Origin, Australia’s largest integrated power generation and energy retail business. Origin has a solid 24% market share in Australia, quality earnings, and stable margins. It also provides a significant opportunity for decarbonization, as it’s retiring a large coal-fired power plant and targets to reduce emissions by 70% by the end of the decade.
No matter how much you’re investing in BEP, you’re likely to earn solidly growing passive income and price appreciation for the long haul, especially since the stock is about 18% undervalued, according to the 12-month analyst consensus price target.
