The TFSA (Tax-Free Savings Account) is an excellent place to invest and earn passive income. Any income earned (including dividends, interest, and capital gains) in the TFSA is protected from tax obligation. All income earned is yours and kept in the account. You don’t need to report your income, and you don’t need to pay any tax on that income.
Use your TFSA to compound tax-free passive income
When you keep all your income, your capital can compound at a much faster rate. If you don’t immediately need your TFSA passive income to meet your living needs, you can take the earned capital and re-invest it into more dividend-producing stocks.
The more dividend stocks you own, the more income you earn, and the more dividend stocks you can buy. Your capital and passive income really start to snowball when you allow this to happen tax-free.
If you are wondering how to earn an average of $350 per month in passive tax-free income, you will probably need around $80,000 invested in your TFSA. Make sure to check that you are allowed to contribute this much; it depends on your age and residency status in Canada.
If you invested $80,000 of your TFSA cash in a diversified portfolio and earned an average dividend yield of 5.25% (very achievable in Canada), you would earn around $4,200 a year (or $350 averaged per month). If you are wondering what stocks could help you achieve that, here are a few for consideration.
Infrastructure stocks for a TFSA
Infrastructure stocks are a good place to look for passive income. Essential infrastructure companies tend to earn contracted/regulated rates of return that are very predictable. As a result, they can afford to pay attractive, safe dividends.
One stock that is great for passive income is Pembina Pipeline (TSX: PPL). It operates a network of energy infrastructure assets (egress and collection pipelines, natural gas processing plants, and storage/export terminals).
Over 80% of its assets are contracted. These contracted streams support its attractive 5.85% dividend yield. The company has a very strong balance sheet, so it has the capacity to grow by investing in new infrastructure projects. It has grown its dividend by a low single-digit rate for the past couple of years.
Other infrastructure stocks that are attractive for income include AltaGas and Fortis.
Real estate stocks
Real estate is another asset that is attractive for earning passive income in a TFSA. Why buy a rental property when you can earn steady income from some of the highest-quality real estate assets in Canada? The best part is you can hold these stocks tax-free in a TFSA.
Dream Industrial REIT (TSX: DIR.UN) is one of Canada’s largest industrial landlords. It owns and manages centrally located warehouse, distribution, and logistics properties in Canada and Europe.
This stock yields 5% today. This real estate investment trust has been seeing very strong demand for its properties. This has translated into strong rental growth and high single-digit growth in cash flows per unit.
It has long-term leases, so it has a foreseeable trajectory for its income. It collects rents monthly, so it also pays distributions monthly.
Other attractive real estate stocks for passive include Granite REIT, First Capital REIT, and BSR REIT.
The Foolish takeaway
Own a widely diversified portfolio, think long term, and buy high-quality businesses, and you can earn durable (and even growing) tax-free passive income in your TFSA.
