Canadians can consider using the Tax-Free Savings Account, or TFSA, as a passive-income vehicle. Introduced in 2009, the TFSA allows you to hold a variety of qualified investments, such as equities, bonds, and exchange-traded funds.
Canadians should understand that the TFSA is sheltered from Canada Revenue Agency taxes. It means any returns in the form of interest, dividends, or capital gains are tax-free.
The TFSA contribution limit in 2024 has increased to $7,000, up from $6,500 in 2023 and $6,000 in 2022. Here’s how you can invest $7,000 for a bulletproof passive-income portfolio in 2024.
Invest in GICs
GICs, or Guaranteed Investment Certificates, are fixed-income instruments offered by banks and other financial lenders. Here, you open a GIC account and deposit a certain sum on which you will be paid interest for a particular period of time. At the end of the deposit term, you will receive the principal amount back.
Rising interest rates in the last two years have made GICs an attractive option for low-risk investors. It is an easy way to begin a passive-income stream at a low cost. Currently, several banks are offering a yield of 5% on GICs. So, a $7,000 investment in a GIC with a 5% yield will help you earn $350 in annual interest each year.
Invest in high-dividend stocks
Passive-income investors can earn a higher yield compared to GICs by investing in quality TSX dividend stocks such as Enbridge (TSX:ENB). An energy infrastructure giant, Enbridge offers you a tasty dividend yield of 7.7%. In addition to dividends, investors can also benefit from capital gains by investing in the blue-chip stock right now.
After adjusting for dividends, ENB stock has returned 744% to shareholders in the last two decades. It indicates annual returns of 11.4%, which is exceptional for a company part of the energy sector.
The majority of Enbridge’s cash flows are tied to inflation-linked long-term contracts, making it relatively immune to fluctuations in commodity prices. In fact, while several energy companies are wrestling with lower profit margins due to falling oil prices, Enbridge is on track to report adjusted earnings of $2.83 per share in 2024, up from $2.81 per share in 2022.
Enbridge’s steady and reliable cash flows have allowed it to increase annual dividends by more than 9.8% annually in the last 29 years, enhancing the effective yield significantly in this period.
Today, an investment of $7,000 in Enbridge stock will help you earn $539 in annual dividends. The dividend payout will double in the next decade if Enbridge increases payments by 7% annually.
The Foolish takeaway
Your investment strategy depends on several factors, including your age, investment horizon, and risk appetite. For an individual nearing retirement, investing in safer instruments such as GICs may be a perfect choice. Further, GICs are ideal for those with an investment horizon of fewer than five years.
Alternatively, young investors with a multi-year horizon can consider buying shares of blue-chip stocks such as Enbridge. As dividend payouts are not guaranteed, it’s essential to create a diversified portfolio of dividend-paying companies, which lowers portfolio risk.
