Passive Income: How to Make $2,500 Per Year Tax-Free

Quality TFSA dividend stocks such as Enbridge can help you earn a steady stream of passive income in 2024.

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Canadian investors can consider using the Tax-Free Savings Account (TFSA) to create a passive stream of recurring income. As any income earned in the registered account is sheltered from Canada Revenue Agency taxes, the proceeds can either be withdrawn or reinvested to benefit from compounded gains over time.

Historically, fixed-income instruments or real estate investments have been used to create a passive-income stream. However, quality dividend stocks are gaining in popularity as investors can also benefit from long-term capital gains in addition to a regular stream of dividend income.

The TFSA was introduced in 2009, and the maximum cumulative contribution room available for investors rose to $95,000 in 2024. Alternatively, in 2023, the average TFSA held roughly $41,500.

So, for you to earn $2,500 per year on a $41,500 TFSA investment, dividend stocks have to yield more than 6%. Here are two quality TSX dividend stocks that can help you earn $2,500 per year.

Enbridge stock

Valued at $100 billion by market cap, Enbridge (TSX:ENB) pays shareholders an annual dividend of $3.66 per share, translating to a forward yield of 7.8%. An energy infrastructure giant, Enbridge has raised dividends by 10% annually on average in the last 29 years, showcasing the resiliency of its cash flows.

Unlike oil and gas producers, Enbridge’s cash flows and earnings are largely immune from fluctuations in oil prices. Instead, a majority of Enbridge’s EBITDA (earnings before interest, tax, depreciation, and amortization) is tied to long-term inflation-linked contracts, resulting in predictable cash flows across market cycles.

Its low-risk business model and cash visibility make Enbridge a top dividend stock to own in 2024, given its high forward yield. Moreover, the TSX giant expects earnings per share to grow between 4% and 6%, with distributable cash flow growth forecast at 3%, driven by organic growth and accretive acquisitions.

Last year, Enbridge also announced plans to acquire three natural gas utilities from Dominion Energy, which would create the largest gas utility business in North America in terms of gas delivery volume.

Enbridge stock trades at a discount of 12.2% to consensus price target estimates. After adjusting for its dividend payout, cumulative returns may be closer to 20% in the next 12 months.

Bank of Montreal stock

One of the largest financial institutions in Canada, Bank of Montreal (TSX:BMO) offers you a forward yield of 4.7%. Despite a challenging macro environment, BMO increased net income by $1.9 billion and adjusted earnings of $2.56 per share in the fiscal first quarter (Q1) of 2024 (ended in January) due to its diversified businesses and conservative lending approach.

BMO emphasized the environment has constrained revenue growth in market-sensitive businesses which was offset by the strength of its personal and commercial segments.

BMO continues to strengthen its capital position and ended Q1 with a common equity tier-one (CET1) ratio of 12.8%, up 30 basis points from the last quarter. The CET1 ratio compares a bank’s capital against its assets, and a higher ratio is favourable.

Priced at 11 times forward earnings, BMO stock is not too expensive and should gain momentum as market sentiment improves.

The Foolish takeaway

COMPANYRECENT PRICENUMBER OF SHARESDIVIDENDTOTAL PAYOUTFREQUENCY
Enbridge $47.07441$0.915$403Quarterly
Bank of Montreal$128.15161$1.51$243Quarterly

Investing a total of $41,500 distributed equally in these two TSX dividend stocks can help you earn $2,584 in annual dividends. You can further diversify your TFSA portfolio by identifying other quality dividend stocks that offer a tasty and growing yield.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Aditya Raghunath has positions in Enbridge. The Motley Fool recommends Dominion Energy and Enbridge. The Motley Fool has a disclosure policy.

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