The big jump in the cost of living in recent years has many people looking for ways to get better returns on their investments without taking on too much risk or getting bumped into a higher marginal tax bracket.
One way to achieve this goal is to hold investments inside a self-directed Tax-Free Savings Account (TFSA).
TFSA limit increase in 2024
The TFSA limit will increase from $6,500 in 2023 to $7,000 in 2024. That will bring the cumulative maximum contribution space per person to $95,000 for anyone who has qualified every year since the inception of the TFSA in 2009. The government indexes the TFSA limit to inflation and declares increases in $500 increments.
Capital gains, dividends, and interest can all be generated inside the TFSA without worrying that some of the profits will have to be shared with the Canada Revenue Agency. All TFSA income is tax-free. In addition, any funds removed from the TFSA during the year will open up equivalent new contribution space in the following calendar year.
Best TFSA investments for passive income
For a long time, investors were pretty much forced to hold dividend stocks to get a decent return on their savings. The sharp increase in interest rates in the past 18 months, however, has led to a big jump in the rates investors can get from no-risk Guaranteed Investment Certificates (GICs). Financial institutions that are Canada Deposit Insurance Corporation (CDIC) members currently offer non-cashable GICs above 5% for multi-year terms. As long as interest rates remain elevated, GIC rates should stay attractive. However, there is a good chance the peak has been reached.
Dividend stocks have fallen out of favour over the past year, as investors flocked to safer alternatives. That has created an opportunity to buy some great Canadian dividend-growth stocks at discounted prices. As a stock declines in value, the yield on the dividend increases. In many cases, investors can now get yields above 6% or 7% from top-quality TSX dividend stocks.
BCE (TSX:BCE) is a good example of a solid dividend-growth stock that looks oversold. The shares trade near $54 at the time of writing compared to $74 at the high point in 2022 and $65 in May this year.
BCE’s core mobile and internet businesses are performing well and provide services that households and companies need regardless of the state of the economy. Higher borrowing costs will lead to a dip in profits this year, but BCE expects to generate revenue growth and free cash flow growth compared to 2022.
BCE raised the dividend by at least 5% in each of the past 15 years. Investors can currently get a 7.1% yield from BCE stock.
The bottom line on TFSA passive income
Investors can quite easily put together a diversified TFSA that holds laddered GICs and a mix of high-yield dividend stocks to get an average yield of at least 6%. That’s unlikely to change much before the start of next year when the new TFSA limit increase brings the maximum total contribution room to $95,000.
An annualized 6% average yield on this amount would generate $5,700 in tax-free passive income.
