Due to its tax-sheltered status, the Tax-Free Savings Account (TFSA) can be used to create a steady stream of dividend income. But identifying long-term dividend winners can be tricky, as you need to bet on companies that have the potential to keep expanding profit margins and cash flows consistently, which, in turn, support dividend increases.
The cumulative TFSA contribution room in 2023 has increased to $88,000. So, let’s see how you can invest $50,000 in this registered account to earn $2,500 in tax-free dividend income each year.
Toronto-Dominion Bank stock
One of the largest banks in North America, Toronto-Dominion Bank (TSX:TD), currently offers shareholders a tasty dividend yield of 4.8%. While TD Bank is part of a highly cyclical industry, it has maintained dividend payouts across market cycles, including the financial crash of 2008 and the COVID-19 pandemic. In the last 20 years, TD Bank has increased dividends by 10% annually, showcasing the resiliency of its balance sheet.
Down 25% from all-time highs, TD Bank stock is trading at less than 10 times forward earnings. It’s forecast to increase adjusted earnings at an annual rate of 10.5% in the next five years. Right now, TD Bank stock is priced at a discount of 25%, given consensus price target estimates.
The ongoing banking crisis in the United States as well as multiple interest rate hikes have driven valuations of bank stocks lower in recent months. However, TD Bank remains a top bet due to its massive size, widening profit margins, and robust liquidity position.
Enbridge stock
One of the most popular dividend stocks in Canada, Enbridge (TSX:ENB) offers investors a dividend yield of 6.8%. Enbridge is a diversified energy infrastructure company and has increased dividends for 28 consecutive years, which is exceptional for an oil and gas company.
With an extensive pipeline of projects, Enbridge is well positioned to keep increasing its cash flows and earnings over time. It has secured $17 billion of capital projects across business segments, including liquids pipelines, renewables, gas distribution, and gas transmission.
A majority of these projects should start generating cash flows by 2025, allowing Enbridge to increase distributable cash flow per share by 3% annually.
With a targeted payout ratio of less than 70%, Enbridge has enough room to strengthen its balance sheet and reinvest in growth projects.
Brookfield Infrastructure Partners stock
The final dividend stock on my list is Brookfield Infrastructure Partners (TSX:BIP.UN), which operates a portfolio of businesses ranging from utilities, to midstream, data centres, and transportation. Around 90% of its revenue is backed by fixed-rate contracts or rate-regulated structures. Moreover, 80% of its cash flows are indexed to inflation, allowing BIP to thrive in an environment where prices are elevated.
Brookfield Infrastructure expects its funds from operations (FFO) per share to increase by 10% in 2023, making it a top bet right now. It already increased dividends by 6% this year, offering shareholders a yield of 4.5%.
Brookfield Infrastructure expects to grow its distribution between 5% and 9% annually, making it attractive to income-seeking investors. BIP stock is also trading at a discount of 35% to consensus price target estimates.
The Foolish takeaway
An investment of $50,000 distributed equally in the three TSX stocks will help investors earn $2,676 in annual dividends. You can double your payouts by 2030 if the companies increase dividends by 10% annually in the next seven years.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY |
| TD Bank | $80 | 208 | $0.96 | $200 | Quarterly |
| Enbridge | $52.77 | 316 | $0.8875 | $281 | Quarterly |
| Brookfield Infrastructure Partners | $45.93 | 363 | $0.5175 | $188 | Quarterly |
