Eligible Canadians can earn tax-free passive income in their Tax-Free Savings Account (TFSA). Taking full advantage of the 2023 TFSA limit of $6,500 is a top priority to save and invest for your future. Just how much tax-free passive income can you make in 10 years with an investment of $6,500 today?
Since interest income is taxed at your marginal tax rate in a non-registered account, conservative investors might choose to instead invest $6,500 of tax-free TFSA contribution in Guaranteed Investment Certificates (GICs). According to ratehub.ca, The best one-year GIC rate is 5.75%, which would earn you risk-free passive income of $373.75. If interest rates were to stay the same, you would earn $373.75 income 10 years later as well.
How much passive income can you generate?
Today, Enbridge offers a dividend yield of just north of 7.5%. On an investment of $6,500, that’ll make an annual income of roughly $489.84, which is about 31% higher than the GIC income.
Based on today’s higher interest rate environment, Enbridge projects the ability to grow its dividend by about 3% per year, which would boost the yield on cost to about 8% by 2025. Management forecasts distributable cash flow per share growth of about 5% post-2025, which can lead to similar dividend growth.
Let’s be a tad more conservative and assume a 4% dividend-growth rate post-2025, which would lead to a yield on cost of 10.5% in 10 years from today. That would represent an annual income of roughly $683.87 in 10 years. This amount would be almost 40% higher than the income generated from the same investment in the first year.
Enbridge has already increased its dividend for 28 consecutive years. Additionally, it has a sustainable payout ratio of 60-70% based on distributable cash flow. So, there’s reason to believe its dividend growth is sustainable.
Earlier this month, Enbridge announced that it was acquiring three natural gas distribution utilities in the United States from Dominion Energy for $19 billion (including about $6 billion assumed debt). To help fund this acquisition, Enbridge sold $4.6 billion worth of common stock from its inventory of treasury shares in a bought deal offering. The group of underwriters, including big Canadian banks, set the equity offering at $44.70 per share. The equity offering was a success, as shares last traded publicly at $47.11 in the stock market.
The acquisition creates the biggest gas utility in North America that delivers approximately 9.3 billion cubic feet per day of gas to about seven million of customers. At the close of this transaction in 2024, Enbridge’s earnings mix will be more balanced, with about 50% in natural gas and renewables infrastructure and 50% in liquids infrastructure.
Enbridge is a blue-chip stock that can deliver juicy passive income as a part of your diversified TFSA. Based on the current dividend yield of about 7.5% and a conservative growth rate of 3%, investors can approximate long-term returns of about 10% per year. At $47.11 per share, analysts actually think the stock is discounted by about 16%. So, it’s more likely to deliver higher returns over the next few years.