The Canada Revenue Agency (CRA) just raised the Tax-Free Savings Account (TFSA) contribution for 2024 to $7,000. They say it is often in crisis you find opportunity. And the bearish market momentum throughout the year has created an opportunity to boost your passive income portfolio. Add the higher TFSA contribution to the mix, and you can build a portfolio that can generate $550/month in tax-free passive income.
How to earn $550/month in tax-free passive income
When building your passive income portfolio, you can diversify your TFSA investments across four to five stocks operating in different sectors. Your portfolio can have a mix of small-cap, large-cap, dividend aristocrats, and high-yield stocks.
The aim is to lock in a 7% dividend yield annually. If your stock can give you 7% income, you can reinvest this amount to buy more dividend stocks while maintaining the 7% yield target. Some years might give you a lower yield, but that can be compensated for in years with a higher yield.
If you are anxious about timing the market, invest $500 every month irrespective of the market condition and get the advantage of dollar-cost averaging. Here’s a table on how your investments will grow tax-free with a 7% average dividend yield.
| Year | Investment | 7% Dividend Yield | Total Amount |
| 2023 | $6,000 | $6,000.0 | |
| 2024 | $6,000 | $420.0 | $12,420.0 |
| 2025 | $6,000 | $869.4 | $19,289.40 |
| 2026 | $6,000 | $1,350.3 | $26,639.66 |
| 2027 | $6,000 | $1,864.8 | $34,504.43 |
| 2028 | $6,000 | $2,415.3 | $42,919.74 |
| 2029 | $6,000 | $3,004.4 | $51,924.13 |
| 2030 | $6,000 | $3,634.7 | $61,558.82 |
| 2031 | $6,000 | $4,309.1 | $71,867.93 |
| 2032 | $6,000 | $5,030.8 | $82,898.69 |
| 2033 | $6,000 | $5,802.9 | $94,701.60 |
| 2034 | $6,629.1 | $101,330.71 |
If you invest $6,000/year for the next 10 years, a 7% yield can earn you $420 in dividend income by the end of 2024. If you reinvest this $420 along with your annual contribution of $6,000, you will earn $869 in dividend income (7% yield) on a $12,420 investment.
This effect of compounding can grow your annual passive income from $420 to $6,630 in 10 years. The TFSA allows you to withdraw your money tax-free anytime. You can decide when and how much to withdraw. If you prefer a monthly withdrawal, a $6,630 annual dividend comes to $550 in monthly passive income tax-free.
TSX’s passive income platter
Today, most dividend stocks are trading near their pandemic lows as many of their peers have slashed dividends owing to debt pressure. However, if you have an eye for value stocks, you can lock in a 7–8% dividend yield that can grow annually in the long term. Here are some stocks worth considering investing in 2023 and 2024.
BCE stock
The telecom stock BCE (TSX: BCE) fell below its pandemic low in October alongside the market but recovered quickly. BCE is a stock moving in tandem with the market. The telco is enjoying strong revenue from 5G subscriptions. Its free cash flow fell in the first half owing to the high depreciation of the aggressive capital spending between 2020 and 2022 and one-off instances.
Despite this, BCE was confident of achieving its full-year FCF guidance of $3.13 billion–$3.37 billion. The first signs of it were visible in its third-quarter earnings as it reported a 17.4% surge in FCF. A slowdown in capital spending and improving profit margins could drive the FCF to $1.27 billion–$1.52 billion. With fundamentals improving, its payout ratio will also improve, and so will its stock price.
Now is the time to lock in a 7.1% dividend yield and a 6% annual dividend growth.
Power Corporation of Canada
Another strong dividend stock is the financial services holding company Power Corporation of Canada (TSX: POW). It has no debt or revenue. POW earns dividend income from its holdings in Great-West Lifeco and IGM Financial. Great-West Lifeco made some alterations to its portfolio by selling Putnam Investments and buying Investment Planning Counsel and Value Partners.
Even POW is moving in tandem with the overall market. While its earnings declined in the short term due to Lifeco’s shuffling, the holding company’s long-term earnings remain stable. It is a stock worth buying at every dip. You can currently lock in a 6% yield and 7% average annual rate.
