Earning tax-free income is possible and nothing new in Canada because of the Tax-Free Savings Account (TFSA). Since its introduction in 2009, the one-of-a-kind investment account is one of the best retirement accounts today, alongside the Registered Retirement Savings Plan (RRSP).
Your advantage as a TFSA holder is that all gains in the account and withdrawals are non-taxable. The Canada Revenue Agency (CRA) steps in only if users over-contribute or carry on a business using the account. The zero-tax feature assures tax-free income from income-producing assets like stocks.
Boston Pizza (TSX:BPF.UN) and Pizza Pizza (TSX:PZA) in the restaurant industry are ideal investments in a TFSA. Both are high-yield income stocks paying monthly dividends. Thus, earning $1,000 monthly tax-free is achievable, provided you know the secret and maintain a long-term view.
TFSA constraints
The CRA sets annual contribution limits for the TFSA. You can’t make a lump-sum investment unless your available (or accumulated) contribution room exceeds the prescribed limit. For 2023, the maximum is $6,500. Even if you own dividend titans, earning $1,000 in tax-free income monthly takes time because of the contribution limits.
The secret to reaching the desired objective is to contribute regularly (max out the limit if possible) and exercise patience. Boston Pizza and Pizza Pizza are cash cows, given their 7.54% average dividend yield. An equal allocation in each ($3,250) using the TFSA limit generates $40.84 monthly.
Assuming the annual limit and dividend yield remain constant, it would take around 24.5 tranches or years of the same contribution amounts to hit the $1,000 target.
Building sales momentum
Restaurants suffered business reversals during the global pandemic due to social distancing and government-mandated lockdowns. Boston Pizza is still in recovery mode post-COVID but doing well. In the first half of 2023, total revenue and net income rose 14.9% and 32.5% year over year to $24.33 million and $19.45 million.
“We are pleased that positive sales momentum continued through the second quarter of 2023, despite the current macroeconomic conditions and industry challenges,” said Jordan Holm, president of Boston Pizza. For the $323.35 million royalty corporation, same-restaurant sales (SRS) drive distribution growth.
In Q2 2023, it rose 69.1% (383 restaurants) compared to 39.1% in Q2 2022. At $15.16 per share (+6.71% year to date), the dividend yield is 8.47%.
Pizza Pizza has a larger royalty pool (743 restaurants) than Boston Pizza. In the first half of 2023, systems sales and royalty income rose 13.5% and 12.9% year over year to $301.2 million and $19.3 million. The adjusted earnings from operations were $15.2 million, or 14.1% higher than a year ago.
Despite lower same-store-sales growth in the first half of 2023 (11.4% versus 17.1% last year), the board approved a 3.5% increase in the monthly dividend. If you invest today ($13.62 per share), Pizza Pizza pays a hefty 6.61% dividend.
More benefits
The TFSA’s usefulness goes beyond the no-tax earnings and zero withdrawal penalties. If you cannot maximize the limit in a year, the unused contribution room carries over to the following year. More importantly, you can contribute until you are 70, 80, or older to reach the desired tax-free income every month.
