A gold mine is a source of wealth. When miners discover a mine, they exploit the land to extract the world’s most popular precious metal. Canadians have a gold mine in the Tax-Free Savings Account (TFSA) if only they exploit it as miners do a real one.
Since investment income or returns earned inside a TFSA are tax-free, you can turn the tax-advantaged account into a gold mine. A $10,000 seed capital investment is a good start, but only if your available contribution room is $10,000 or more and if it were 2015, the year with the highest TFSA limit.
However, the 2023 TFSA contribution limit is only $6,500. Thus, the suggestion is to maximize the limit this year and then wait for next year to contribute an additional $3,500. An ideal combination in a TFSA today is MCAN Mortgage (TSX: MKP) and Acadian Timber (TSX: ADN).
Given the average dividend yield of 7.9%, an equal allocation ($5,000 in each) will produce $197.50 in quarterly passive income without a sweat. You can elect to keep reinvesting the quarterly dividends to realize the power of compounding. Your TFSA balance should balloon to $22,070.11 in 10 years.
Quality loan portfolio
MCAN Mortgage is regulated by the Office of the Superintendent of Financial Institutions Canada (OSFI). It also operates as a Mortgage Investment Corporation (MIC) under Canada’s Income Tax Act.
The $557.6 million loan company’s specialized portfolio consists of Canadian mortgages, loans, private investment funds, and real estate investment trusts (REITs). At $16.02 per share (+11.77% year to date), the yield of this dividend titan is 8.96%.
Thus far in 2023, the challenging market condition hasn’t paralyzed the business. In Q1 2023, net income rose 50% to $23.3 million versus Q1 2022. Management said MCAN’s portfolio is resilient through various economic cycles and should deliver consistent financial performance over the long term. The target growth rate in corporate assets is 10%. It also commits to sustaining prudent dividend growth.
Stable sector
Acadian Timber owns vast timberland assets in Eastern Canada and the Northeastern United States. The $290.6 million company produces and sells softwood and hardwood sawlogs, pulpwood, and biomass by-products. At $17.06 per share, current investors enjoy a 16.1% year-to-date gain on top of the juicy 6.84% dividend.
While sales in Q1 2023 dipped 16% year over year to $22.4 million, net income rose 35% to $5.6 million. Its President and CEO, Adam Sheparski, was happy with the strong regional demand and pricing for both sawlogs and pulpwood during the quarter. However, Acadian needs to increase contractor capacity to harvest additional volumes for the rest of 2022.
The positive for Acadian is the stability of the northeastern forestry sector. Management also expects the long‐term demand for new homes, and repair and remodel activity to support the demand for Acadian products.
Two tranches
The TFSA is highly popular because of its tax-free money growth and withdrawal features. However, the golden rule is not to over-contribute because the Canada Revenue Agency (CRA) imposes a 1% penalty on the excess amount. Also, investors cannot invest $10,000 upfront in a single year but must do it in two tranches to avoid paying the penalty.
