Earning $3,000 a year in tax-free dividends looks daunting but possible. Canadians can have their way or get the amount through the Tax-Free Savings Account (TFSA). This savings account is unique and one-of-a-kind because all interest, gains, and dividend income earned are tax exempt, including withdrawals.
By simple math, a $50,000 investment in a dividend stock that yields 6% and inside a TFSA will produce $3,000 passive income. However, the TFSA has annual contribution limits, and users can’t overcontribute even if they have upfront cash. If the maximum contribution limit stays at $6,500 (2023 limit), it would take a TFSA investor almost eight years (7.69 years) to accumulate the desired number of shares.
Slate Grocery (TSX: SGR.UN) and Wall Financial (TSX: WFC) are best for yield-hungry investors and ideal holdings in a TFSA. The former yields 9.14%, while the latter pays a 15.35% dividend. Given their off-the-charts dividend offer, you can generate $3,000 in tax-free dividends in a shorter period.
Resilient portfolio
Slate Grocery, a $750.34 million real estate investment trust (REIT), owns and operates grocery-anchored real estate in the United States. Besides the juicy dividend yield and affordable share price ($12.61), the payout frequency is monthly. Your TFSA balance will compound faster because you can reinvest the dividends 12 times a year instead of the typical four.
In the second quarter (Q2) of 2023, rental revenue and net operating income (NOI) increased 27.5% and 22.4% to US$50.3 million and US$40.3 million versus Q2 2022. However, net income fell 68.1% year over year to US$18.9 million. Notably, cash flow from operations rose 79.9% to US$22.7 million from a year ago.
Slate Grocery’s chief executive officer Blair Welch said, “The second-quarter results highlight our team’s continued operational excellence and ability to drive consistent organic growth across the REIT’s portfolio … Strong leasing volumes at attractive spreads have increased overall occupancy and income, further enhancing the stability of the REIT’s portfolio.”
The REIT can endure economic downturns because the grocery-anchored property portfolio is resilient and boasts strong credit tenants. The leased properties are in major U.S. markets with high customer traffic. Slate Grocery can also include rent escalation clauses in its lease contracts. More importantly, high occupancy rates provide durable cash flows.
Cash cow
Wall Financial is a cash cow if the basis is the dividend yield. The $633.6 million real estate company develops and manages residential and commercial rental units. It also develops and constructs residential housing for resale and hotel properties (which it manages, too).
Thus far in fiscal 2024, the Wall Financial isn’t in the red. In the six months that ended July 31, 2023, total revenue increased 4.9% year over year to $77.5 million, although net earnings dropped 69.7% to $11.9 million from a year ago.
At $19.55 per share, the dividend offer is too good to be true. Prospective investors worry about a dividend cut given the high payout ratio (over 460%). Expect alarm bells to ring if earnings develop a downtrend. Wall Financial might have to adjust its payouts to be consistent with income level.
Follow the golden rule
The TFSA is a wealth-builder and tax-free passive-income generator. Users can produce the desired annual dividends but are subject to the prescribed annual contributions. The Canada Revenue Agency imposes a penalty if you violate this golden rule.
