Retirees: How to Earn $4,000 a Year Tax-Free

As a retiree, it is possible to earn $4,000 per year of tax-free passive income inside your TFSA (Tax-Free Savings Account). If you collected an average dividend yield of 7% across your TFSA portfolio, you would only need to invest around $57,000 to earn $4,000 a year.

Certainly, that result is possible. However, it is not necessarily recommended.

Stocks with yields over 7% present significant risks. It may be a weak balance sheet, macroeconomic issues, declining growth, or a weakening competitive edge that causes the market to demand a higher yield for that risk.

Retirees: Don’t be deceived by stocks with +7% dividend yields

While you may earn a significant yield of passive income temporarily, it could be at the risk of serious capital loss and even income loss (if its dividend rate gets cut). That is why it is essential to not just focus on yield.

It is better to earn a conservative average yield, but preserve and grow your income stream (and personal capital) over time.

If a retiree invested the cumulative TFSA contribution ($88,000 today) but earned a smaller 4.75% average yield, you could still earn around $4,200 of income per year.

Here’s a mini hypothetical portfolio that demonstrates how a retiree could achieve that level of tax-free passive income in their TFSA. We recommend you diversify far beyond this, but this displays the types of dividend stocks worth owning in this environment and for the long term.

Fortis: The image of dependability

Fortis (TSX:FTS) is one of the most dependable dividend stocks in Canada. Its dividend has grown consecutively for 50 years. That is an amazing statistic.

Over the past decade, it stock is up 68% (around 5.3% compounded per year). However, once you add in dividends, Fortis’s total returns are more than double at 146% (or 9.3% compounded per year).

Given the essential nature of regulated power and gas, Fortis earns a steadily growing stream of earnings. Right now, its goal is to grow earnings per share and dividends by around 4-6% per year to 2028. It yields 4.4% today.

If you put a third of your total TFSA contribution (around $29,333) into Fortis stock, you would earn $323.32 quarterly, or $1,293.28 of annual tax-free income.

Granite REIT: A solid long-term dividend stock for retirees

Another stalwart of safety for a TFSA retiree portfolio is Granite Real Estate Investment Trust (TSX:GRT.UN). It has 137 income-producing industrial and logistics properties. It also has six major developments in progress.

Granite’s properties play a major role in the logistics infrastructure network across Canada, the U.S., and Europe. Its well-located properties are able to attract staple tenants like Amazon and True Value. It has 96% occupancy, long-term leases (over six years on average), and a sector-leading balance sheet.

This stock yields 4.44% right now. Put $28,333 of TFSA cash to work in Granite, and you would earn $104.53 monthly, or $1,254.40 of tax-free annual income. It has a 12-year record of annual dividend growth.

Brookfield Infrastructure: A retiree’s play for income and growth

Brookfield Infrastructure Partners (TSX:BIP.UN) is a retiree’s best opportunity for income, growth, and value today. This company has a world-class portfolio of essential assets (like pipelines, railroads, ports, data centres, and utilities).

Not only is the company growing its operations organically, but it has also made some great recent deals to upgrade its portfolio. It is well positioned for major global trends like decarbonization, de-globalization, and digitization.

This stock yields 5.4% today. Other than the pandemic crash, it is at its lowest valuation in five years. If a retiree invested $28,333 into BIP stock, they would earn $380.59 quarterly, or $1,522.34. That would likely grow from here, because the company has a long record of increasing its dividend by 6-9% annually.