1 Dividend Stock That Could Create $683.87 in Tax-Free Passive Income in 10 Years

You can earn massive passive income tax free from your TFSA. Here’s how with your first dividend stock or GIC!

| More on:
Canadian Dollars

Image source: Getty Images

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.

However, you could earn much more income by taking a greater risk in dividend stocks. One dividend stock that already pays a massive dividend today is Enbridge (TSX:ENB).

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.

Recent news

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.

Investor takeaway

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.

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 positions in Enbridge. The Motley Fool recommends Dominion Energy and Enbridge. The Motley Fool has a disclosure policy.

More on Dividend Stocks

Baubles On Snow With Snowy Christmas Tree
Dividend Stocks

3 TSX Stocks to Buy in December 2023

Here's why quality TSX stocks such as Jamieson Wellness should be part of your shopping list in December 2023.

Read more »

analyze data
Dividend Stocks

Adjusting Your Portfolio for the New Normal: Higher Interest Rates in Canada

The 5% interest rate is here to stay until the second half of 2024. It's time to adjust your portfolio…

Read more »

Gas pipelines
Dividend Stocks

Is Enbridge Stock a Buy for its Big Dividend?

Enbridge is down more than 10% over the past year. Should you buy the dip?

Read more »

Various Canadian dollars in gray pants pocket
Dividend Stocks

Are These the Best Canadian Dividend Stocks for a High-Rate Environment?

Are you looking for some of the best Canadian dividend stocks to buy? Here are two top picks for decades…

Read more »

stock research, analyze data
Dividend Stocks

2 Top Stocks to Buy With $500 Today

Investing in the stock market does not always require massive capital. You can begin with just $500 allocated to stocks…

Read more »

Dollar symbol and Canadian flag on keyboard
Dividend Stocks

Got $500? 2 Top Canadian Stocks to Buy in December 2023

These two top Canadian stocks are doing well and might warrant a place in your self-directed portfolio before the year…

Read more »

eat food
Dividend Stocks

Maple Leaf Foods: Bringing Home the Bacon With a Tasty Dividend

Maple Leaf Foods is a stock with a reliable 3.44% dividend yield, which is backed by a defensive business in…

Read more »

A stock price graph showing growth over time
Dividend Stocks

Up 8% in 3 Months, Is Fortis Stock a Buy Today?

Fortis stock (TSX:FTS) continued to show signs of recovery this fall, but as we enter a new year, is the…

Read more »