How a TFSA Can Earn $3,100 Per Year in Tax-Free Passive Income

The TFSA could be the best way to create passive income, and this dividend stock can help for long-term income to boot.

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In the quest for financial stability and passive income, investors often explore various avenues. Among the myriad of investment options available, the Tax-Free Savings Account (TFSA) stands out as a versatile tool for creating passive income. This can be through dividends and returns. In this article, we’ll delve into the reasons why the TFSA is an excellent choice for building wealth. Furthermore, we’ll discuss why Toronto-Dominion Bank (TSX:TD) is a promising stock for those looking to create passive income.

The power of TFSA for passive income

The TFSA, introduced in Canada in 2009, has become a go-to choice for investors aiming to generate passive income. Unlike traditional investment accounts, TFSA contributions are made with after-tax dollars. Further, that dividends and capital gains earned within the account are entirely tax-free. This makes it an ideal vehicle for long-term wealth accumulation.

Investing in dividend-paying stocks within a TFSA can be a lucrative strategy for passive income. Companies like TD stock, which offer consistent dividend yields, can significantly boost your passive-income stream. TD stock currently provides a robust 4.73% dividend yield, making it an attractive option for income-focused investors.

Unlike other investment accounts, TFSA earnings, whether from dividends or capital gains, are not subject to capital gains taxes. This means that all the money earned within your TFSA remains untouched by the taxman. For investors looking to maximize their passive income, this tax-free status is a significant advantage.

A TFSA allows investors to hold various types of investments, from stocks and bonds to mutual funds and exchange-traded funds (ETFs). This flexibility ensures that you can diversify your portfolio to mitigate risks and boost your passive-income potential.

TD stock: A strong choice for passive income

When it comes to building passive income through dividends, TD stock shines as a prime choice. As of recent data, TD stock trades at just 7.73 times earnings, indicating that it may be undervalued. This lower price-to-earnings ratio suggests that the stock has room for potential price appreciation, which could enhance your total returns over time.

TD stock offers investors a remarkable 4.73% dividend yield. This makes it a compelling choice for those seeking to create passive income through dividends. The consistent payouts over the years reflect the bank’s commitment to rewarding its shareholders.

TD stock has maintained its reputation for financial stability. The fact that the bank has thrived and continued to deliver dividends in uncertain economic conditions speaks volumes about its resilience. Investors can count on a steady income stream from TD stock, even during turbulent times.

TD stock’s investment in Charles Schwab adds an extra layer of diversification to its income streams. The bank’s reported equity in net income for the fourth quarter is expected to be around $234 million from this investment. While Schwab reported a decrease in its net income, this diversification effort underscores TD stock’s strategic approach to bolstering its income potential.

Bottom line

In the pursuit of passive income, the TFSA remains an exceptional choice for Canadian investors. The tax benefits and flexibility of the TFSA, combined with dividend income from stocks like TD stock, offer an unparalleled path to long-term wealth creation. And should shares return to 52-week highs, here is how much a $15,000 investment could get investors today!

COMPANYRECENT PRICENUMBER OF SHARESDIVIDENDTOTAL PAYOUTFREQUENCYPORTFOLIO TOTAL
TD – now$81185$3.84$710.40quarterly$15,000
TD – highs$94185$3.84$710.40quarterly$17,390

Altogether, with returns of $2,390 and annual dividends of $710.40, investors can grab $3,100.40 in passive income! With an attractive valuation, a substantial dividend yield, and resilience in challenging economic conditions, TD stock stands out as a promising stock to invest in for those looking to generate passive income through dividends. The forthcoming quarterly results indicate that TD stock’s investments are poised to contribute significantly to its bottom line. This makes it an even more appealing choice for income-focused investors. In an era where passive income is highly sought after, the TFSA and TD stock are an investor’s dream team.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Amy Legate-Wolfe has positions in Toronto-Dominion Bank. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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