TFSA Magic: Invest $30,000 and Get $1,200 a Year Tax-Free

A TFSA works like magic to help investors earn their desired tax-free passive income every year.

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The Tax-Free Savings Account (TFSA) is a magical piggy bank because money grows tax-free before your eyes. Its crafters want Canadians to use the tax-advantaged account, save, and earn tax-free income for life. If you want the magic to work, contribute regularly and hold income-producing assets in the account.

A $30,000 investment in a dividend stock that pays a 4% dividend will generate $1,200 in tax-free income in one year. However, you can get more with high-yield stocks like TransAlta Renewables (TSX:RNW) and Transcontinental Inc. (TSX:TCL.A). With an average dividend yield of 6.885% and $15,000 worth of shares each, the annual payout is $2,065.50.

Ready for clean energy expansion

The landscape in the power markets is changing. Investors are looking to add more green stocks to their portfolios. TransAlta Renewables is the largest generator of wind power in Canada. This $3.4 billion renewable power company invests in highly contracted renewable and natural gas power generation facilities and other infrastructure assets. It aims to provide stable, consistent returns to investors.

TransAlta’s economic interests and operations are in Canada, the United States, and Australia. Long-term power purchase agreements support the 48 facilities in the diversified asset platform that provide highly contracted cash flows. Management anticipates a massive clean energy expansion in the current decade, and thus conducted a comprehensive assessment of challenges late last year.

For 2023 and beyond, activities will focus on re-contracting and extending the portfolio’s cash flows and realizing growth through organic expansions of existing assets. In 2022, revenue increased 19.1% to $560 million versus 2021, although net earnings fell 46.8% to $74 million. However, operating income rose nearly 32% year over year to $91 million.

The renewable energy stock trades at $12.56 per share and beats the broader market year to date, +14.57% versus +5.44%. If you invest today, the dividend yield is a mouthwatering 7.49%. TransAlta pays monthly dividends so that investors can reinvest dividends 12 times a year, not 4. Your TFSA balance should compound faster with this payout frequency.

Solid financial position

Transcontinental, Canada’s largest printer, is one of North America’s leading flexible packaging companies. The $1.3 billion firm also owns TC Media, a well-known Canadian French-language educational publishing group in the supplemental educational material market.

The business strategy is straightforward. Management plans to grow the Packaging Sector through organic sales growth and acquisitions. Transcontinental would optimize the Printing Sector’s platform while capturing growth opportunities in promising verticals. The publishing group should grow using this packaging strategy.

In the three months ended January 29, 2023, net earnings dropped to $1 million compared to $18.4 million in Q1 fiscal 2022 due to the significant decrease in the printing volume. Nevertheless, management expects the Packaging Sector to deliver organic volume growth in fiscal 2023 owing to investments in new production equipment, signed contracts, and the introduction of new products.

President and CEO, Peter Brues, said, “Our financial position is solid thanks to our ability to generate significant cash flows and having no major debt maturities until 2025.” He adds that Transcontinental can maintain the dividend yield (6.28%). The current share price is $14.44 (-2.45% year to date).

Weave your magic

This TFSA magic can work in your favour even if you don’t have $30,000 today. Contribute every year and accumulate more shares as you go along.

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 recommends Transcontinental. The Motley Fool has a disclosure policy.

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