Do you want to earn passive income in your Tax-Free Savings Account (TFSA)?
If so, you would be well advised to invest in dividend stocks.
You can hold bonds as well as stocks in a TFSA, but high-yield dividend stocks currently have more yield than money market funds do. Therefore, they can generate more passive income.
Of course, there are risks with stocks that aren’t present with bond funds or guaranteed investment certificates (GICs). For example, companies sometimes cut their dividend payments. This is an undesirable outcome — one that investors have to be aware of.
Nevertheless, investing in dividend stocks is a good way to boost your TFSA income. If you were 18 or older in 2009, you have up to $88,000 worth of TFSA contribution room available. Invest that at a 6% yield, and you’ll get $5,280 per year in passive dividend income. Here’s how.
Step #1: Open an account
If you don’t have a TFSA yet, your first step on your journey to tax-free passive income is to open an account. Simply go to your bank and talk to a financial advisor. Be sure to tell them that you want a “self-directed” account: some TFSAs are pre-invested in funds. Perhaps you want the funds that your bank offers, but most don’t have the 6% yield required to get to $5,280 per year in passive TFSA income.
Step #2: Deposit the money
Once you have a TFSA, your next step is to deposit money into it. If you already have a TFSA, you may be able to skip this step, as you may have some money in the account already. Depositing money into a TFSA is easy; simply log into your bank account and do a transfer from your chequing or savings account to your TFSA. The maximum contribution in 2023 is $88,000.
Step #3: Find some high-yield stocks
Once you’ve got your TFSA funded, you’ll need to invest in some high-yield stocks. It takes a 6% portfolio yield to get to $5,280 per year in dividend income with $88,000 invested, so you’ll want to look at stocks that yield 6% or higher.
Consider Canadian Imperial Bank of Commerce (TSX:CM) stock. It’s a bank stock with a 6.2% yield at today’s prices. Like many bank stocks, it’s fairly cheap, trading at just 8.2 times earnings, 2.2 times sales, and 1.06 times book value. The company has only a 48% payout ratio (dividend divided by earnings), so the yield is not only high but also fairly safe. It’s possible to get to $5,280 per year in passive income by investing in CM stock, as the table below shows:
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT (ANNUAL) | FREQUENCY |
| CIBC | $55.79 | 1,517 | $0.87 | $5,280 | Quarterly |
As you can see, CM shares can easily pay you $5,280 per year in passive dividend income.
Step #4: Invest progressively over time
A final step on your path to tax-free dividend income is to invest progressively over time. New TFSA contribution room is added every year, so even if your account is maxed out now, you can add a little to it each and every year. Over time, your contributions will start to add up, generating ever-rising amounts of passive income.
