How to Earn $1,500 Per Year in Tax-Free Income

The major reason for maximizing your TFSA (Tax-Free Savings Account) contribution is to benefit from its tax-sheltered status. Any returns generated in a TFSA in the form of interests, dividends, and capital gains are exempt from taxes. So, it makes sense to hold a portfolio of dividend-growth stocks in this registered account and create a recurring income stream for life.

Typically, companies that grow their dividends each year generate stable cash flows across market cycles and increase profit margins consistently. Due to their steady earnings growth, the best dividend stocks also help you improve overall returns via long-term capital gains.

So, let’s see which TSX dividend stocks you should hold in a TFSA to earn $1,500 per year in tax-free income.

Enbridge stock

An energy infrastructure giant, Enbridge (TSX:ENB), currently offers you a tasty dividend yield of 8%. Enbridge stock has lost momentum in the last year due to falling oil prices, rising interest rates, a sluggish macro economy, and a multi-billion-dollar acquisition on the horizon.

Last month, Enbridge announced its intention to acquire three natural gas utilities from Dominion Energy for $14 billion, a majority of which will be funded by debt. However, Enbridge expects the acquisition to be accretive to earnings, allowing the company to keep raising dividends in the upcoming decade. Despite the cyclicality associated with energy stocks, Enbridge has increased dividends by 10% annually in the last 28 years, showcasing the resiliency of its cash flows.

A majority of Enbridge’s cash flows are tied to inflation and backed by long-term contracts, shielding it from fluctuations in commodity prices. Priced at 16 times forward earnings, ENB stock is quite cheap, given its earnings growth forecast and tasty dividend yield.

Analysts remain bullish on ENB stock, which currently trades at a discount of 25% to consensus price target estimates.

Pizza Pizza Royalty stock

Pizza Pizza Royalty (TSX:PZA) owns and franchises quick-service restaurants. Its asset-light model allows the company to pay shareholders an annual dividend of $0.90 per share, translating to a dividend yield of 6.7%.

Its franchise-based business model allows Pizza Pizza to collect royalties from franchise partners, which is tied to sales. So, Pizza Pizza does not have to accommodate for changes in input prices or wages, resulting in stable cash flows.

In the first six months of 2023, Pizza Pizza delivered double-digit growth in same-store sales due to promotional activities and menu innovations. It also added 16 net restaurants in the last 12 months and is on track to report revenue of $621 million in 2023.

Priced at 14.5 times forward earnings, PZA stock is reasonably valued, given that adjusted earnings are forecast to increase by 9% this year.

The Foolish takeaway

You need to invest a total of $20,450 equally distributed between the two stocks to earn $1,500 in annual dividend income. Moreover, if the two companies increase their dividends by 10% annually, your payouts will double in the next seven years.

Canadians should identify similar dividend stocks with sustainable yields and create a diversified portfolio that lowers overall risk.