Being rich is a choice. How you choose to use your money determines how much you earn and when you retire. Which account you use to invest in which stock can determine how much benefit you can reap from your investments. Fortunately, the Canada Revenue Agency (CRA) allows you to grow your investments and withdraw tax-free through the Tax-Free Savings Account (TFSA).
How to use TFSA to its fullest potential
While you are in your mid-30s to early 40s, you can use a TFSA to invest in growth stocks that can give you double-digit average annual returns in 10 to 15 years. Once you build your portfolio value, you can gradually start booking profits on growth stocks. Quite simply, invest some investment profits in high-dividend stocks and accumulate a sizeable number of income-paying shares.
For instance, Mary invested $20,000 in January 2015 to buy 1,129 shares of a resilient growth stock Descartes Systems at $17.71/share. The value of her 1,129 shares is $121,254 today. Mary turns 48 this year and plans to accelerate her retirement planning. She invests $6,000/year in her TFSA towards building a passive income portfolio. She also sells $6,000 worth of Descartes shares every year as and when the stock reaches closer to its 52-week high of that year.
In total, she is contributing $1,000 towards TFSA passive income. In her passive income portfolio, she invests in four to five stocks giving a combined yield of 6% or more and grows dividends.
Mary’s passive portfolio could grow in the following manner (excluding dividend growth). The table assumes Mary is reinvesting the dividend income to earn a further 6% yield.
| Year | Investment | 6% Dividend Yield | Total Amount |
| 2023 | $12,000 | $12,000.0 | |
| 2024 | $12,000 | $720.0 | $24,720.0 |
| 2025 | $12,000 | $1,483.2 | $38,203.20 |
| 2026 | $12,000 | $2,292.2 | $52,495.39 |
| 2027 | $12,000 | $3,149.7 | $67,645.12 |
| 2028 | $12,000 | $4,058.7 | $83,703.82 |
| 2029 | $12,000 | $5,022.2 | $100,726.05 |
| 2030 | $12,000 | $6,043.6 | $118,769.61 |
| 2031 | $12,000 | $7,126.2 | $137,895.79 |
| 2032 | $12,000 | $8,273.7 | $158,169.54 |
| 2033 | $12,000 | $9,490.2 | $179,659.71 |
| 2034 | $12,000 | $10,779.6 | $202,439.29 |
| 2035 | $12,146.4 |
After 13 years, Mary’s TFSA passive income portfolio could help her earn $1,000 in monthly dividends.
Two stocks for your $1,000/month TFSA passive income
If you are also in your mid-40s, it is time to start building your TFSA passive income. Here are two dividend stocks you can buy without a doubt and build a 6% yield.
BCE stock
Telcos have a rate advantage over other utilities. The rates of electricity, gas, and water are regulated, but that of broadband is not. Three players control over 86% of the Canadian telecom market share. They do not indulge in price wars to keep their profit margins intact.
You can buy shares of BCE (TSX: BCE), the dividend aristocrat riding the 5G wave, through your TFSA at or below a $60–$62 price and lock in a 6% yield. The telecom giant has been growing dividends at a 5% annual growth rate even as it accelerated its capital spending to build the 5G network. During the build-out program, the company exceeded its historical target payout ratio of 65–75%. But it can still continue to grow dividends as its expanded broadband network starts bringing in more cashflows.
Enbridge stock
Another dividend aristocrat you can buy with your TFSA is Enbridge (TSX: ENB). Unlike BCE, Enbridge’s toll rates for oil and gas pipelines are regulated. But it has the early mover advantage that gave it time to build a massive pipeline infrastructure.
Enbridge has been increasing its gas pipeline infrastructure over the past few years. The timing is perfect. North America became the world’s biggest exporter of liquefied natural gas (LNG), supplying LNG to Europe after sanctions on Russia.
Enbridge has slowed its dividend growth rate from over 9% to 3% as it channels its cash flows towards accelerating its gas pipeline buildout. Unlike BCE, Enbridge aims to maintain its target payout ratio of 60–70% during the build-out.
Investing tip
A $500 monthly investment in each of the two stocks can help you build a 6% dividend portfolio. Their dividend growth could even help you achieve $1,000/month in TFSA passive income before 13 years.
