Earn $1,500 a Year in Tax-Free Income With 3 Canadian Dividend Aristocrats

The Tax-Free Savings Account (TFSA) is more than just a savings account. By maxing out your TFSA contribution room and using it wisely, you can benefit greatly from its tax-sheltered status. You see, any returns from your investments held in a TFSA are exempt from taxes. It means any profits in the form of capital gains, interest, and dividends can grow your account balance without incurring income taxes.

For the savvy investor, it is the perfect opportunity to create a recurring and tax-free, passive-income stream by using their TFSA to create a dividend-income portfolio. Focusing on reliable dividend-growth stocks can be great for this purpose.

Typically, publicly traded companies that grow payouts each year have stable cash flows across market cycles, are well capitalized, and experience consistent profit margin increases to fund growing payouts. Due to overall solid fundamentals, these stocks can also grow shareholder value through long-term capital gains.

Today, we will look closely at three Canadian Dividend Aristocrats you can consider for this purpose.

Canadian Imperial Bank of Commerce

Canadian Imperial Bank of Commerce (TSX:CM) is a $44.95 billion market capitalization multinational banking and financial services company headquartered in Toronto. The fifth-largest among the Big Six Canadian banks, it is a mainstay in many investor portfolios as a “buy-and-hold” investment.

Between long-term capital gains and reliable dividend increases, it comes as no wonder. Despite recent setbacks due to broader economic factors, it is a compelling long-term investment. The bank has paid dividends to its shareholders since 1868 without missing a payment.

In the last decade, it has grown its payouts at a 6.1% compound annual growth rate (CAGR). As of this writing, the stock trades for $48.64 per share and boasts a juicy 7.15% dividend yield.

BCE

BCE (TSX:BCE) is another major industry player. Boasting a $46.23 billion market capitalization, it is Canada’s largest telecom and internet services company.

BCE stock enjoys a strong position in the industry with more of the market share than its closest competitors. Additionally, it operates in a sector providing essential services. Despite market cycles, BCE stock can continue generating stable and strong cash flows.

BCE is also a reliable dividend stock. The Canadian Dividend Aristocrat has increased its payouts each year since 2008. In the last five years, it has grown its payouts at a 10.52% CAGR. The higher interest rates will cause a dent in its profits in the near term.

However, its capital investments to expand its services can offset that significantly in the long run. As of this writing, BCE stock trades for $50.68 per share and boasts a juicy 7.64% dividend yield.

Capital Power

Capital Power (TSX:CPX) is a $4.22 billion market capitalization independent power generation company headquartered in Edmonton. The North American power producer develops, acquires, and operates power plants.

Its portfolio of power-production assets is diversified across natural gas, coal, wind, solar, and solid-fuel energy facilities. Generating most of its revenue through natural gas and electricity sales, it has stable cash flows it can use to fund growing its payouts comfortably.

Capital Power stock has increased its dividends by 7% annually for the last 10 years, highlighting the resilience of its cash flows. Despite the high interest rate environment weighing on its profitability, it seems well-capitalized enough to weather the storm. As of this writing, it trades for $36.10 per share, boasting a 6.81% dividend yield.

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Foolish takeaway

When using your TFSA, you must identify the available contribution room and gradually build the portfolio. Exceeding the contribution limit means risking losing the tax-free status of your account.

The example below shows how you can use your TFSA to earn around $1,500 per year in tax-free income by using it to hold Canadian Dividend Aristocrats. While a hypothetical example, it paints a clear picture of how it can work.