The Tax-Free Savings Account (TFSA) added another $6,500 in contribution room this year. That brings the grand total to $88,000 for those who were 18 in 2009 when the program was first introduced. And it also means you have a solid amount of room for creating a passive-income portfolio.
For most of us, however, we don’t have $88,000 just laying around ready to be invested. That’s why we’re going to focus on the $6,500. This is also beneficial if you’re a younger investor just getting started, who may not have the entire $88,000 available.
Today, let’s look at how to turn that $6,500 into something worth celebrating.
What we mean by passive income
Investors creating a passive-income portfolio are creating income that comes out on a regular basis, without doing anything. After making that original purchase, you can look forward to income coming into your TFSA, for example, every month, quarter, or year.
What’s more, if you want to add to your TFSA and investments, you can create automated contributions. It doesn’t stop there either. You can use the passive income you create for items, of course, but you can also choose to reinvest it. This is a great option if you want to create a passive-income portfolio but don’t have a lot of cash to do it. Let’s look at three companies I would consider.
Three dividend stocks for passive income
For younger investors, you want stocks that will perform well over the next few decades. Here, I might consider Bank of Montreal (TSX:BMO), Canadian Utilities (TSX:CU) and Brookfield Renewable Partners (TSX:BEP.UN).
Each of these stocks have been around for decades — over 100 years, in some cases! All three have seen shares climb by a steady rate as well, only falling during market downturns such as this one. However, each then has recovered to pre-drop prices, providing a great opportunity to buy them today.
What’s more, all have high dividend yields. BMO stock offers a yield at 5.11%, Brookfield stock is at 4.4%, and Canadian Utilities is at 4.94%.
Putting these to work
If you were to put $6,500 into these passive-income stocks, this could create a massive passive-income portfolio — even over just a decade! There are just a few things to consider.
We’ll average out the compound annual growth rate (CAGR) for both share growth and dividend growth. This would come to a CAGR of 5% in share growth and dividend CAGR at around 7.5%. We’ll also average out the share price to $65 as well as the dividend yield to 4.88%. And we’ll add $6,500 each year.
Here’s what that could turn your passive-income portfolio into.
| Year | Share Price | Shares Owned | Annual Dividend Per Share | Annual Dividend | After DRIP Value | Annual Contribution | Year End Stock Price | New Shares Purchased | Year End Shares Owned | New Balance |
| 1 | $65 | 100 | $3.17 | $317 | $6,817 | $6,500 | $68 | 95 | 195 | $13,301 |
| 2 | $68 | 195 | $3.41 | $665 | $13,965 | $6,500 | $72 | 90 | 285 | $20,415 |
| 3 | $72 | 285 | $3.66 | $1,044 | $21,459 | $6,500 | $75 | 86 | 371 | $27,930 |
| 4 | $75 | 371 | $3.94 | $1,461 | $29,391 | $6,500 | $79 | 82 | 453 | $35,870 |
| 5 | $79 | 453 | $4.23 | $1,918 | $37,787 | $6,500 | $83 | 78 | 531 | $44,258 |
| 6 | $83 | 531 | $4.45 | $2,360 | $46,619 | $6,500 | $87 | 74 | 605 | $53,064 |
| 7 | $87 | 605 | $4.78 | $2,891 | $55,955 | $6,500 | $91 | 71 | 676 | $62,449 |
| 8 | $91 | 676 | $5.14 | $3,473 | $65,922 | $6,500 | $96 | 67 | 743 | $72,356 |
| 9 | $96 | 743 | $5.52 | $4,103 | $76,459 | $6,500 | $101 | 64 | 807 | $82,913 |
| 10 | $101 | 807 | $5.94 | $4,791 | $87,703 | $6,500 | $106 | 61 | 868 | $94,162 |
As you can see, after just one decade you’ll be left with a total portfolio of $94,162! That’s by making a total investment of $65,000 for returns of $29,162.
