How Much Can You Really Earn in Passive TFSA Income?

With a diversified portfolio of high yield stocks like Enbridge (TSX:ENB) you could potentially get up to $4,400 per year in a TFSA.

| More on:
Businessperson's Hand Putting Coin In Piggybank

Image source: Getty Images

Have you ever wondered how much money you can actually earn in tax-free, passive Tax-Free Savings Account (TFSA) income?

There are articles out there promising all kinds of figures, most of which are a bit unrealistic. Sure, if you have $1 million to invest, then you can get $30,000 per year in passive income pretty easily. But if your starting amount is lower than that, you can still get some cash flow going with much less invested. Here’s how much.

Up to $4,400 per year

If you invest $88,000 — the maximum amount you can contribute to a TFSA — you can get $4,400 per year in passive tax-free income. This requires a slightly above-average dividend yield, but not one so high that you’re really pushing it with risk in order to achieve it. At a 5% yield, you can get $4,440 in annual cash back with $88,000 invested.

How the math works on that

If you’re wondering how $88,000 in investments could produce $4,400 per year in passive income, here’s how the math works.

Multiply $88,000 by 0.05. You get to $4,400. Therefore, if you invest at a 5% yield, you get $4,400 back in annual tax-free passive income. That’s assuming, of course, that you hold your entire portfolio in a TFSA — which is doable if you were 18 or older in 2009, as $88,000 worth of space has accumulated since then.

Some stocks that could get you there

Once you’ve got some money deposited into a TFSA, the next step is to invest your money. You’ll have to start small, but if you have $88,000 in savings, you can deposit that amount right away. Otherwise, you can get to that amount by contributing smaller amounts over a period of years.

You could start building up a diversified TFSA portfolio yielding 5% with a position in Enbridge (TSX:ENB). Enbridge is a Canadian pipeline company with very stable revenue. It “rents” space on its pipelines to oil and gas companies, who typically agree to remain clients for long periods of time. As a result, its revenue is stable and dependable.

Now, Enbridge has a 6.6% dividend yield. You’ll actually get much more than $4,400 per year in passive income if you invest $88,000 in it. So, why not just do that?

COMPANYRECENT PRICENUMBER OF SHARESDIVIDENDTOTAL PAYOUTFREQUENCY
Enbridge$49.821,240$0.8875 ($3.55 per year)$4,400/yearQuarterly
Enbridge dividend math

It comes down to risk. It pays to diversify your holdings so that you’re not too exposed to too much risk in one company. Enbridge has very stable revenue and cash flows, but it also pays out more in dividends than it earns in net income or free cash flow. That creates dividend risk. So, instead of investing all of your money in Enbridge, you can invest in a whole portfolio of stocks like TD Bank, Bank of Nova Scotia, Enbridge, and Fortis to get about a 5% yield. This will get you to $4,400 per month if the stocks are equally weighted and you invest $88,000.

Of course, the best risk-management strategy is to invest in more than just four stocks. Unless you have extremely deep knowledge of individual companies, it’s best to hold 25 stocks or more. You can even buy the whole market through an index fund, though that won’t produce the kind of income described in this article.

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 Andrew Button has positions in Toronto-Dominion Bank. The Motley Fool recommends Bank Of Nova Scotia, Enbridge, and Fortis. The Motley Fool has a disclosure policy.

More on Dividend Stocks

Canadian Dollars
Dividend Stocks

The Best TSX Stocks to Invest $5,000 in October 2023

The bearish market momentum of October 2023 has created a ripe time to buy three TSX stocks that can outperform…

Read more »

Increasing yield
Dividend Stocks

2 TSX Dividend Stocks With Lucrative Yields in October 2023

These stocks pay great dividends that should continue to grow.

Read more »

Gold medal
Dividend Stocks

Canadian Blue-Chip Stocks: The Best of the Best for October 2023

These TSX giants deserve to be on your radar.

Read more »

Various Canadian dollars in gray pants pocket
Dividend Stocks

Earn $50 a Week With These 3 Stocks

The right dividend stocks offer more than just a high yield. They offer sustainability and growth, so you can rely…

Read more »

oil and gas pipeline
Dividend Stocks

Where Will Enbridge Stock Be in 10 Years?

I wouldn’t be surprised if ENB stock even doubles in value in the next 10 years. Here why.

Read more »

protect, safe, trust
Dividend Stocks

3 Growth Stocks Safe Enough to Hold for a Decade (or More)

Safe growth stocks that can be held for a decade (or more) may offer steady, predictable returns, making them reliable…

Read more »

sale discount best price
Dividend Stocks

These 2 Discounted Stocks Are Ready for a Comeback

Partial recoveries are quite common, but true comebacks (full recovery) are relatively rare, which makes identifying them harder than identifying…

Read more »

Woman has an idea
Dividend Stocks

Where to Invest $10,000 in October 2023

Its crucial to diversify your investments and reduce portfolio risk while investing amid a challenging macro economic backdrop.

Read more »