Many people misunderstand the use case of a TFSA (Tax-Free Savings Account). Big banks advertise “high-interest” TFSA savings accounts where you can earn a promotional period of elevated interest rates. While this can seem attractive for an easy no-risk return, it actually benefits the banks more than it does you.
Don’t waste your TFSA on “high-interest” savings accounts
The bank takes your savings, gives you a minimal amount of interest, and then invests the deposit into higher-returning opportunities (like Canadian mortgages). The bank wants you to keep as much of your savings in mere savings.
Yet the TFSA was created so that Canadians can very tax efficiently grow wealth for retirement. Even if you earn a 5% interest rate for three months (as advertised by RBC), the remainder of interest you earn in the year is significantly lower. It means that you are hardly maximizing the power of tax-free compounding.
That is why dividend-paying stocks can be an attractive alternative. Not only do you collect passive income tax-free in your TFSA, but you also can have the potential to earn capital upside over time.
In fact, with investing $30,000, you could earn as much as $1,600 of tax-free income per year. Here are three TSX stocks that could make that happen.
A top Canadian telecom stock
Today, TELUS (TSX: T) stock has a 6.33% dividend yield. That is the highest it has been in more than 10 years. Now, the reason its dividend yield is so high is because its stock has fallen significantly this year.
TELUS just went through a disappointing quarter. The company has been spending heavily on capital projects, and its debt has crept up. However, management announced several efficiency and cost-cutting measures (including a major set of layoffs).
Likewise, its outsized infrastructure investment cycle is nearing the end. Once completed in 2024, it expects to earn a substantial amount of excess cash. That should help reduce debt and drastically improve its balance sheet.
If you put $10,000 into TELUS stock, you would earn $159.86 every three months, or $639.45 annually inside your TFSA.
A renewable giant to hold in a TFSA
Brookfield Renewable Partners (TSX: BEP.UN) is likewise trading with the highest dividend yield it has had in the past few years. Today, it yields 5.2%.
Brookfield is one of the largest developers of renewable power and alternative energy in the world. The renewable sector has faced significant challenges in 2023. Yet Brookfield continues to post strong 10% funds from operation (FFO) per unit growth.
It operates a diverse array of assets across the world. As a result, it has an enormous backlog of projects that should fuel strong accretive growth in the years ahead.
Put $10,000 of TFSA cash into BEP stock, and you would earn $133.32 quarterly, or $533.26 annually.
A leading energy stock
Canadian Natural Resources (TSX: CNQ) is on the complete opposite spectrum of Brookfield Renewables. It is Canada’s largest producer of oil and its second-largest producer of natural gas.
Canadian Natural is one of the most efficient, profitable, and durable energy players in Canada and maybe even the world. It has decades of reserves, a low-cost operating model, and the capacity to generate substantial cash when energy prices are high.
Right now, this TFSA stock yields 4.3%. It has an incredible dividend growth record. Put $10,000 into CNQ stock, and you would earn $108 quarterly, or $432 annually.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY |
| TELUS | $22.65 | 441 | $0.3625 | $159.86 | Quarterly |
| Brookfield Renewable Partners | $34.03 | 293 | $0.455 | $133.32 | Quarterly |
| Canadian Natural Resources | $83.13 | 120 | $0.90 | $108.00 | Quarterly |
