Earning an average of $500 per month of tax-free income in your TFSA (Tax-Free Savings Account) is possible. However, it may not be wise or realistic.
You need to qualify for the maximum TFSA contribution
Firstly, the current total TFSA contribution limit is $88,000. However, that $88,000 is technically only available to Canadians who were 18 years or older in 2009. That means, at the very least, you need to be 32 years old and have been a Canadian resident/citizen over that period to utilize the full contribution amount.
You need to save $88,000
Secondly, you need to have at least $88,000 available in savings for investing. This is a significant amount. Most Canadians will need to take time to save thoughtfully. Be sure to build an emergency/rainy day fund as well. Investing in stocks is volatile and can be risky, so only invest in your TFSA what you can afford to lose.
You need to earn a substantial yield for big monthly income
Thirdly, if you wanted to earn $500 of average passive income per month (or $6,000 per year), you would need at least a 6.8% average dividend yield on your $88,000 investment. While that yield is possible on the TSX today, it may not make for the best investment portfolio.
Many stocks with yields over 7% tend to have serious business/financial risks. The market is efficient at sniffing out businesses in distress. As the market values more risk, it pushes the stock down, and the dividend rises to compensate for that risk.
Any time you see a dividend yield pushing 8-10%, there is a pretty good chance the dividend will get cut quickly after. Several recent examples include Northwest Healthcare REIT, Algonquin Power, and Corus Entertainment.
Don’t just focus on big dividends; look for business quality first
Rather than just focusing on big dividend yields, focus on the quality and sustainability of a dividend. You can’t claim capital losses in a TFSA, so you want to own a portfolio of stocks that have a foreseeable future of rising in value.
Make sure your TFSA portfolio is well diversified by stock, sector, and industry. Look for top industry players with great records of earnings/cash flow growth. Growing per share earnings/cash flows is a great predictor of dividend growth for the future.
CNQ: A great stock for a TFSA
One dividend stock that could be an excellent fit for a long-term TFSA hold is Canadian Natural Resources (TSX:CNQ).
Canadian Natural Resources is Canada’s largest energy producer. Many may look down on it as a cyclical energy stock. Yet this cyclical stock has delivered +20 years of average annual dividend growth over 20%. That is an incredible track record.
This company is a very efficient producer. It can produce oil for less than US$40 per barrel. Any price above that is gravy. Likewise, it has over three decades of energy reserves that it can tap at only a minimal cost.
The company’s balance sheet continues to improve. This means more returns are likely coming back to shareholders. It yields 4.1%, but that could get better if its record of dividend growth and special dividends continues.
The Foolish takeaway
Other stocks that could have a similar track record of exceptional income and capital returns include Brookfield Infrastructure Partners, Brookfield Asset Management, Granite REIT, Canadian National Railway, and Fortis. While some of these stocks are depressed, they offer very attractive value today.
You may not earn $500 per month of passive income immediately. However, over time, there is a good possibility that these types of stocks could grow into that level of income. It may take patience, but the long-term results in a TFSA could be far superior to just a stock that pays a big dividend.
