TFSA: Need Income? Turn $6,500 Into $5,085 Every Year

Save regularly and invest for income to get more income from dividend stocks in your Tax-Free Savings Account. Here’s how.

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This year’s Tax-Free Savings Account (TFSA) contribution limit is $6,500. That’s $6,500 of investment room for us to make tax-free returns! Regular savings of $6,500 can be incredibly powerful over time in a tax-free environment. The idea is to invest for a reasonable rate of return, say, the long-term Canadian stock market rate of return of approximately 8%.

The Rule of 72 approximates that on an initial investment of $6,500, you can double it to $13,000 in about nine years. However, if you consistently save and invest $6,500 at the start of each year for a reasonable return of 8% per year, your TFSA portfolio will grow to $101,695.67 in 10 years! Assuming a 5% portfolio yield of safe income generation, you would make $5,084.78 of tax-free income in 10 years.

Give your TFSA another 20 years and it would grow to $795,248.14 on a return of 8% per year. A portfolio yield of 5% would make $39,762.41 of tax-free income a year then. This is the power and magic of compound interest. The idea is to keep the money invested and reinvest your investment income as well.

Where to get a minimum of yield of 5% and return of 8%?

The present environment of higher interest rates has weighed on the valuation of dividend stocks, which has allowed TFSA investors to get more income from investment of new money in dividend stocks. Here are two dividend stocks that appear to fit the criteria of a minimum dividend yield of 5% and projected rate of return of at least 8%.

Emera

The stock of regulated utility Emera (TSX:EMA) just pulled back more than 8% from a peak. At $54.34 per share, it offers a dividend yield of almost 5.1%. It’s a good time to explore the dividend stock for conservative investor who are focused on income.

To get an idea of the scale of the utility, it generated $7.6 billion of revenue last year with about $40 billion of assets. From 2023 to 2025, it has a capital plan to invest $8 to $9 billion. Notably, about three-quarters of its capital plan is focused in Florida.

The utility has paid increasing dividends for about 16 years. For reference, its five-year dividend-growth rate is 4.7%. It plans to increase its dividend by 4-5% pear year through 2025. Therefore, assuming no valuation expansion, it should be able to deliver total returns of about 9% annually over the next couple of years.

TC Energy

Large-cap energy infrastructure company TC Energy (TSX:TRP) is another reliable Canadian Dividend Aristocrat for high income. It has increased its dividend for about 22 consecutive years. For reference, its five-year dividend-growth rate is 7.6%, but its more recent dividend growth has been north of 3% per year.

The stock has sold off from higher interest rates, which has also resulted in slower growth. It’s down about 23% from its 2022 peak of roughly $70 per share. At $53.57 per share at writing, it offers a dividend yield of 6.9%. Investors only need very little growth of 1.1% per year to achieve the 8% total return target. Given that the stock is slightly undervalued, it has a good chance of beating the 8% return target over the next three to five years.

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 Kay Ng has no position in any of the stocks mentioned. The Motley Fool recommends Emera. The Motley Fool has a disclosure policy.

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