The Tax-Free Savings Account (TFSA) can be used to buy and hold quality dividend stocks, allowing Canadians to create a predictable stream of passive income. Though dividend payments are not a guarantee. So, to maintain these payments, it’s essential to identify companies that generate stable cash flows across market cycles, increase dividends consistently, and have a sustainable payout ratio.
In addition to regular dividends, the best companies also increase investor wealth via long-term capital gains. Moreover, any returns in the form of dividends or capital gains are exempt from Canada Revenue Agency taxes.
So, let’s see how dividend stocks can help you earn $500 per month in your TFSA.
Pembina Pipeline stock
An oil and gas infrastructure company that pays investors an attractive dividend, Pembina Pipeline (TSX: PPL) reported adjusted earnings of $5.12 per share in 2022. The stock is priced at eight times trailing earnings, which is quite cheap given its tasty dividend yield of 6%.
Due to rising oil prices in 2022, Pembina managed to end the year with a net margin of more than 20%. Its contracted cash flows and high-margin business allowed the company to maintain its dividend payout even during the COVID-19 pandemic, showcasing the resiliency of its business model.
With a payout ratio of less than 55%, Pembina Pipeline has enough room to increase dividends, reinvest in capital expenditures, and lower its debt profile. In the last 10 years, its dividends have risen by 5% annually, despite volatile crude oil prices.
Due to a pullback in share prices, Pembina Pipeline stock is trading at a discount of 21% to consensus price target estimates.
Freehold Royalties stock
An oil and gas royalty company, Freehold Royalties (TSX: FRU) currently yields 7.4%. It acquires and manages royalty interests on properties where companies extract crude oil, natural gas, natural gas liquids, and potash.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY |
| TransAlta Renewables | $12.18 | 2,307 | $0.078 | $180 | Monthly |
| Pembina Pipeline | $43.20 | 650 | $0.218 | $142 | Monthly |
| Freehold Royalties | $14.68 | 1,914 | $0.09 | $172 | Monthly |
Freehold Royalties has successfully expanded its portfolio of properties in North America, and its revenue is linked to high-quality payors across top-tier operating assets. Despite a fall in commodity prices in the last six months, the company emphasized that drilling activity on its lands is quite strong within its U.S. acreage.
Priced at 15.5 times forward earnings, the TSX stock is trading at a discount of 38% to consensus price target estimates.
TransAlta Renewables stock
The final dividend stock on my list is TransAlta Renewables (TSX: RNW), one of the largest clean energy companies in Canada. In 2022, TransAlta increased its renewable power production by 326 gigawatts year over year due to the additions of the Windrise wind facility, higher wind resources, and a solar facility in North Carolina.
Despite an inflationary environment, TransAlta increased adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) by $24 million to $487 million in 2022. However, higher interest expenses reduced its free cash flow by $10 million to $347 million.
TransAlta Renewables offers investors a tasty dividend yield of 7.9%. Given its market cap of $3.3 billion, it’s trading at 10 times free cash flow, which is really cheap.
The Foolish takeaway
In order to earn $500 in monthly dividend income, you need to invest $28,100 equally in these three TSX stocks, given an average dividend yield of 7.1%.
