The way passive income works, regular investments over a long period compound to a large pool that keeps growing. You can build a passive-income pool in two ways: buy growth stocks early that can double or triple your investments and shift them to dividend stocks. But this is risky. If the growth stock fails to grow your capital, you will have lower investment in dividend stocks. A less-risky way of building a Tax-Free Savings Account (TFSA) passive income is buying Dividend Aristocrats.
Where to invest to build a TFSA passive income
You need a dividend stock offering a higher yield, high dividend-growth rate and lower stock price. Telus (TSX:T) has slipped almost 30% from its April 2022 peak since the Bank of Canada began interest rate hikes. This dip is almost over, and the central bank will likely cut rates next year. While this might keep the stock price low for some time, a recovery is likely as its interest expense will fall, boosting profits.
So far, Telus maintains its outlook to grow dividend by 7-10% annually from 2023 to 2025. If the company can sustain another year of high interest rates, things could get better for the telco in 2025. Even now, it has grown its dividend by 7.3% in 2023, hinting that cash flows are stable. However, a 7% growth rate may not be sustainable in the long term. Hence, I expect its dividend compound annual growth rate (CAGR) of 5%, taking a conservative outlook.
Let us make a proforma table of how Telus stock can grow your TFSA passive income if you invest a decent amount every month.
How to invest $333 a month for $6,000 annual passive income
Firstly, calculate an amount that you can comfortably invest every month. Even if you miss out on a few months, you can invest for three to four months in one go if the stock is trading at a lower range. Assuming you invest $333 every month, you will invest $4,000 in a year in Telus.
Secondly, determine an average stock price at which you would prefer to buy the stock. You can keep flexibility around the cost price as it will average in the long term. I have set the average cost price for Telus shares at $28. The stock is trading a little above $24, which means you can buy 13.7 stocks with a $333 investment. As you can’t buy 0.7 stocks, you could consider buying 13 stocks and carrying forward the balance amount to next month.
How to earn $6,000 in yearly passive income
| Year | Annual Investment | Telus Share count $28 average stock price | Total Shares | Dividend per Share (5% CAGR) | Total dividend |
| Mar-24 | $4,000.00 | 143.0 | 143.0 | $1.4294 | $204.40 |
| Mar-25 | $4,204.40 | 150.0 | 293.0 | $1.5009 | $439.75 |
| Mar-26 | $4,439.75 | 158.0 | 451.0 | $1.5759 | $710.74 |
| Mar-27 | $4,710.74 | 168.0 | 619.0 | $1.6547 | $1,024.26 |
| Mar-28 | $5,024.26 | 179.0 | 798.0 | $1.7374 | $1,386.48 |
| Mar-29 | $5,386.48 | 192.0 | 990.0 | $1.8243 | $1,806.07 |
| Mar-30 | $5,806.07 | 207.0 | 1,197.0 | $1.9155 | $2,292.89 |
| Mar-31 | $6,292.89 | 225.0 | 1,422.0 | $2.0113 | $2,860.08 |
| Mar-32 | $6,860.08 | 245.0 | 1,667.0 | $2.1119 | $3,520.50 |
| Mar-33 | $7,520.50 | 268.0 | 1,935.0 | $2.2175 | $4,290.80 |
| Mar-34 | $8,290.80 | 296.0 | 2,231.0 | $2.3283 | $5,194.53 |
| Mar-35 | $9,194.53 | 328.0 | 2,559.0 | $2.4448 | $6,256.14 |
A $4,000 investment can buy 143 shares of Telus in 2024 at $28 per share and give total dividends of $204.4. You can reinvest the dividend amount in Telus’s dividend-reinvestment plan (DRIP) and save on brokerage. And since you are reinvesting the dividend inside the TFSA, your TFSA contribution remains unaffected. Remember, investment income can grow tax-free, which means the entire $204.4 will be reinvested by Telus itself. Continue this trend till your last column of passive income surpasses $6,000.
Dividend reinvestment, a $4,000 annual investment through TFSA contribution, and 5% dividend growth can grow yearly passive income from $439 in 2025 to $6,256 by 2035.
Investor tip
It is impossible to forecast for a 10- to 12-year period with accuracy. Hence, you can start with the above table as the original expectation and keep changing the estimates with actual figures. In some years, it might underperform and overperform in some. But in the long term, the performance will normalize and generate the desired passive income. If the stock continues to underperform in the long term, you can switch to another stock.
