The Tax-Free Savings Account (TFSA) is a popular registered retirement account among Canadians. Introduced in 2009, the TFSA is an investment account that allows you to hold asset classes such as bonds, equities, and even cryptocurrencies (via ETFs, of course).
Moreover, any gains generated in the TFSA in the form of interests, dividends, or capital gains are exempt from Canada Revenue Agency taxes. While the maximum cumulative TFSA contribution room has grown to $95,000 in 2024, the average TFSA balance is much lower, at $41,510.
In the last two years, households have been impacted by headwinds, including rising interest rates and inflation. According to a survey by the Bank of Montreal, basic monthly costs surged by $397 year over year in 2023, as 68% of respondents claimed their finances are negatively impacted by current economic conditions.
It may be difficult to allocate your income towards savings and investments due to rising costs. However, you may look to lower discretionary expenses such as eating out, shopping, and traveling to maintain your investment levels.
Keeping this in mind, let’s see how TFSA investors can earn $1,890 in annual tax-free dividends in 2024.
Diversify your TFSA holdings
Given the average TFSA balance is around $40,000, it’s essential to diversify your portfolio and lower investment risk. Investors can consider allocating their savings to guaranteed investment certificates, dividend ETFs, and high dividend stocks. Let’s dive deeper.
Invest in GICs
Guaranteed investment certificates, or GICs, are gaining in popularity amid higher interest rates in 2024. Several banks and financial institutions offer a yield of roughly 5%, making the fixed-income instrument quite attractive.
GICs are ideal for short-term investors who can lock in an inflation-beating yield for a specific period of time. You can allocate around 20%, or $8,000, of your TFSA contribution limit to GICs and earn $400 in annual interest.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY |
| ZDV ETF | $20.24 | 1,186 | $0.07 | $83 | Monthly |
| Brookfield Renewable | $31.41 | 255 | $0.4825 | $123 | Quarterly |
Invest in dividend ETFs
Investing in dividend ETFs will provide you with exposure to a basket of dividend stocks across sectors and lower portfolio risk. One such ETF is the BMO Canadian Dividend ETF (TSX:ZDV). The ETF uses a rule-based methodology that considers a company’s dividend growth, liquidity, and payout ratio.
Investing in dividend ETFs is ideal for investors looking for income and growth solutions. Further, the ZDV provides you with exposure to high dividend-paying Canadian equities such as Bank of Nova Scotia, Royal Bank of Canada, and Canadian Natural Resources.
The ZDV ETF offers you a monthly payout of $0.07 per share, translating to a forward yield of 4.15%. You can invest 60% of your TFSA balance or $24,000 in the ETF, allowing you to earn close to $1,000 in annual dividends.
Invest in dividend stocks
Investors with a higher risk appetite can also consider investing in individual blue-chip dividend stocks such as Brookfield Renewable Partners (TSX:BEP.UN). In the last two years, asset-heavy renewable stocks have trailed the broader markets significantly due to interest rate hikes, allowing you to buy the dip and enjoy an outsized yield.
Down 47% from all-time highs, BEP stock offers a tasty yield of 6.1%. You can identify other high-dividend stocks with steady cash flows and sustainable payout ratios and allocate the rest to these stocks. Given a 6.1% yield, an $8,000 investment will help you earn $492 in annual dividends. Basically, you can earn $1,890 in annual tax-free dividends in your TFSA with $40,000 in contributions.
