How to Use Your TFSA to Earn $2,000 Per Year in Passive Income

Holding blue-chip dividend stocks such as Enbridge in your TFSA can help you earn tax-free income for life.

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Canadians should look to leverage the tax-sheltered status of the TFSA, or Tax-Free Savings Account. Any returns generated in a TFSA in the form of dividends or capital gains are exempt from taxes, making the registered account ideal for holding quality dividend stocks. The best dividend stocks are those that regularly increase their payouts as well as deliver share price appreciation over time.

Here’s how you can use the TFSA to earn $2,000 in tax-free dividend income for life.

Invest in blue-chip energy stocks such as Enbridge

One of the most popular TSX dividend stocks is Enbridge (TSX:ENB), which offers you a forward yield of 7.8%. Despite the cyclicality associated with oil prices, Enbridge has increased its payouts by 10% annually in the last 28 years due to its predictable cash flows.

Enbridge has increased its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) from $2.5 billion in 2008 to $15.5 billion in 2022. In this period, its dividends have increased from $0.66 per share to $3.44 per share.

Enbridge is a diversified midstream company that transports 30% of the crude oil in North America. It also transports 20% of the natural gas consumed in the U.S. Its low-risk commercial and financial profile allows Enbridge to generate stable cash flows across business cycles. For instance, 98% of its cash flows are contracted, while 80% of EBITDA is indexed to inflation.

Priced at 15.8 times forward earnings, ENB stock trades at a discount of 22% to consensus price target estimates.

Invest in RBC stock

Another TSX giant is Royal Bank of Canada (TSX:RY), which is also the largest company in Canada. Similar to Enbridge, RBC is part of a cyclical sector. But it has returned close to 150% to shareholders after adjusting for dividends in the last 10 years, outpacing the TSX index.

Investors are wary of a tepid lending environment due to interest rate hikes, which is bound to reduce the demand for loans across verticals. Moreover, as the cost of debt has risen at a significant pace, the risk of loan defaults is much higher in the near term.

A challenging macro environment has dragged RBC stock lower by 22% from all-time highs. Alternatively, it currently offers shareholders a dividend yield of 4.7%. Further, RBC has increased its dividends by 10.6% annually in the last 24 years, which is exceptional for a bank stock.

Priced at 10.3 times forward earnings, RBC stock trades at a discount of 18% to consensus price target estimates.

The Foolish takeaway

The average dividend yield you get by investing in these two TSX giants is about 6.25%. So, you need to invest a total of $32,000 in your TFSA, equally distributed between Enbridge and RBC, to earn $2,000 in annual dividend income. The maximum cumulative TFSA contribution room has increased to $88,000 in 2023.

COMPANYRECENT PRICENUMBER OF SHARESDIVIDENDTOTAL PAYOUTFREQUENCY
Enbridge$45.14355$0.8875$315Quarterly
Royal Bank of Canada$116.20138$1.35$186Quarterly

In case the payouts increase by 7% each year, your annual dividend income will double to $4,000 in the next 10 years. You can also identify other blue-chip TSX stocks with tasty dividend yields and add them to your TFSA portfolio, which lowers overall risk through diversification.

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 Aditya Raghunath has positions in Enbridge. The Motley Fool recommends Enbridge. The Motley Fool has a disclosure policy.

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