The Tax-Free Savings Account (TFSA) is one of the best ways that investors can create passive income. Yet there are two ways that investors must consider when looking at creating passive income through the TFSA.
Certainly, there are the options of investing in stocks that provide dividends. This will certainly bring in passive income each year, quarter or even every month. But don’t forget, returns are another part of creating passive income that shouldn’t be forgotten.
Today, we’re going to look at how much a $300 investment each month into a top dividend stock could create in your TFSA by the end of 2023.
First, the sector
Before we begin, let’s look at a top dividend stock investors can consider on the TSX today. For me, the best area of the market with the easiest turnaround in share price for high returns is the banking sector. Here in Canada, we have an oligopoly of Canadian banks. There simply isn’t the competition that we see down south in the United States.
Because of this, Canadians don’t have much choice but to use one of the Big Six banks, which also makes them a safer investment. There hasn’t been a banking crisis in Canada, in fact, since the 1800s. Even better, only three banks have ever failed in the country: Home Bank of Canada in 1923 and both the Canadian Commercial Bank and Northland Bank in 1985. This means banks have made it through world wars, several recessions, and even the Great Depression.
Now, the bank
Because the banking sector is so solid, this is why when shares drop, it’s a great time to pick them up for passive income in your TFSA. These banking stocks have pretty much always produced dividends, increasing them on an annual basis.
One of the best, however, is Canadian Imperial Bank of Commerce (TSX:CM) right now. Shares of CIBC stock are down 15% in the last year, as of writing, but up 2.4% year to date. In fact, there’s been some stabilization in the last month, as it looks like we may be nearing the end of high inflation, along with perhaps fewer rate hikes from the Bank of Canada.
That’s why the stock is a great one to pick up now. Its shares have totally rebounded, and they certainly will in the future. Therefore, investors can pick up CIBC stock while it offers a 6.17% dividend yield and trades at just 10.8 times earnings. You can look forward to growth in passive income both from dividends as well as through returns, as it makes its way back to 52-week highs.
How much you could receive
Let’s say you put $300 towards CIBC stock each and every month for the next year and see it climb back to 52-week highs. Below, we’ll look at how much that could get you if you were to buy $300 right now on the TSX today and add $300 each month.
| STOCK | PRICE | SHARES | DIVIDEND (ANNUAL) | FREQUENCY | TOTAL DIVIDEND (ANNUAL) | TOTAL RETURNS |
| CM | $56 | 64 | $3.48 | Quarterly | $222.72 | $222.72 |
| CM – 52-week highs | $68.74 | 64 | $3.48 | Quarterly | $222.72 | $4,622.08 |
As you can see, if you were to purchase the total of $3,600 in shares (or $300 per month) right now, that would bring in returns of $222.72 right away from annual dividend passive income. That’s what would come your way, even if shares didn’t move at all. But when they reach 52-week highs, you’ll have returns plus that income. That would give you a total of $4,622.08 in your portfolio, or passive income from dividends and returns totalling $1,022.08!
